Texas Business Series: Understanding Unemployment Tax

Starting a new business is exciting, but it also comes with many responsibilities, including paying taxes. One of the taxes that new business owners in Texas need to be aware of is the employer unemployment tax. This tax is collected by the Texas Workforce Commission (TWC) and is used to fund unemployment benefits for eligible workers.

• The Interplay Between FUTA and Texas Unemployment Tax

The Federal Unemployment Tax Act (FUTA) is a federal law that requires employers to pay unemployment taxes to fund unemployment benefits for eligible workers. The FUTA tax rate is 6% on the first $7,000 of taxable wages paid to each employee per year. However, employers who pay state unemployment taxes on a timely basis are eligible for a credit of up to 5.4%, resulting in a net FUTA tax rate of 0.6%.

The FUTA tax is separate from the state unemployment tax, which is paid by employers to fund state unemployment benefits.

The impact of the FUTA tax on an employer's unemployment tax paid to Texas depends on the employer's experience rating. If an employer has a good experience rating and pays state unemployment taxes on a timely basis, they may be eligible for the maximum credit of 5.4% against their FUTA tax liability. This can significantly reduce the employer's federal tax liability and their overall tax burden.

However, if an employer has a poor experience rating or does not pay state unemployment taxes on a timely basis, they may not be eligible for the maximum credit against their FUTA tax liability. This can increase the employer's federal tax liability and their overall tax burden.

• Calculating the Employer Unemployment Tax in Texas

The employer unemployment tax in Texas is based on the wages paid to employees. The tax rate is determined by the employer's experience rating, which is calculated by the TWC. The experience rating is based on an employer's history of paying unemployment taxes and having employees file claims for unemployment benefits.

For new employers, the tax rate is generally 2.7% on the first $9,000 in wages paid to each employee. This rate applies for the first three years of business. After that, the employer's experience rating is calculated, and their tax rate is adjusted accordingly. The tax rate can range from 0.31% to 6.31% of taxable wages.

To calculate the employer unemployment tax in Texas, the employer multiplies the taxable wages by the applicable tax rate. For example, if the tax rate is 2.7% and the taxable wages for a particular employee are $10,000, the employer would owe $270 in unemployment tax for that employee.

• Understanding the Experience Rating

The experience rating is an important factor in calculating the employer unemployment tax in Texas. It is a measure of an employer's history of layoffs and unemployment benefit claims. The experience rating is calculated annually by the TWC based on the employer's history over the previous three years.

If an employer has a history of laying off employees or having employees file claims for unemployment benefits, their experience rating will be higher. A higher experience rating means a higher tax rate, which can increase the employer's tax liability.

On the other hand, if an employer has a history of stable employment and few unemployment benefit claims, their experience rating will be lower. A lower experience rating means a lower tax rate, which can reduce the employer's tax liability.

It's important for new business owners in Texas to understand the employer unemployment tax and the experience rating. By monitoring their experience rating and implementing strategies to reduce layoffs and unemployment benefit claims, employers can minimize their tax liability and contribute to the stability of the state's unemployment system.

Starting a new business in Texas comes with many responsibilities, including paying the employer unemployment tax. Understanding how the tax is calculated and how the experience rating affects the tax rate can help new business owners plan for their tax liabilities and manage their expenses effectively.

Now that you understand how employer unemployment tax is calculated by Texas, take a look at 4 ways you can reduce your tax burden.