How to Manage Employee Payroll for Your Small Business

stephenvillesbdc
Jul 23
3 min read

Your Step-by-Step Guide to Payroll, Taxes, and Compliance in the Lone Star State

Running a small business comes with plenty of responsibilities, but managing employee payroll doesn’t have to be one of the most stressful. Whether you’re hiring your first employee or scaling up your team, understanding the basics of payroll is crucial for legal compliance, employee satisfaction, and smooth business operations.

In this guide, we’ll walk you through payroll basics, including taxes, systems, hiring, and staying compliant with Texas labor laws.

Payroll Basics: What Is Payroll, Anyway?

Payroll refers to the entire process of compensating employees for their work. This includes:

Calculating wages
Withholding the appropriate taxes
Paying employees via direct deposit or check
Submitting tax payments to the IRS and state agencies
Filing payroll tax reports

For most small businesses, managing payroll involves:

Gross pay: Total earnings before deductions
Deductions: Taxes, Social Security, Medicare, retirement contributions, etc.
Net pay: Take-home pay after deductions

Step 1: Hiring Employees the Right Way

Before running payroll, make sure your hiring process is legally sound:

Get an EIN (Employer Identification Number) from the IRS. You’ll need it to report taxes.
Set up a Texas Workforce Commission (TWC) account to report wages and pay unemployment taxes.
Verify employee eligibility using Form I-9 and E-Verify (optional in Texas but recommended).
Have employees complete IRS Form W-4 and Texas Form C-1 (for unemployment).
Classify workers correctly: employee vs. independent contractor. Misclassification can lead to hefty fines.

Step 2: Understanding Payroll Taxes

As a Texas employer, you'll need to withhold and pay the following:

Federal Payroll Taxes:

Federal income tax (based on W-4)
Social Security tax (6.2% employer match)
Medicare tax (1.45% employer match)
FUTA (Federal Unemployment Tax Act): 6.0% on the first $7,000 of wages, but most get a credit, reducing it to 0.6%

State Payroll Taxes (Texas):

No state income tax!
But Texas requires you to pay State Unemployment Tax (SUTA) to the TWC. Rates vary, but most small businesses start at around 2.7%.

Step 3: Set Up a Payroll System

You can manage payroll in-house or outsource it. Here are your options:

1. Manual Payroll

Use spreadsheets or templates, calculate taxes, file forms. Best for businesses with 1–2 employees and a strong attention to detail.

2. Payroll Software

Popular options include Gusto, QuickBooks Payroll, ADP, and Patriot. These platforms automate tax filing, direct deposit, and reporting.

3. Outsource to a Payroll Provider or CPA

If you’re not confident in-house or need to focus elsewhere, a professional can ensure compliance and handle everything for you.

Regardless of which system you choose, make sure you:

Set a regular pay schedule (biweekly, monthly, etc.)
Keep detailed payroll records for at least four years
File federal Form 941 quarterly and W-2s annually

Step 4: Complying with Texas Labor Laws

Texas labor law compliance includes:

Minimum Wage

Texas follows the federal minimum wage: $7.25/hour. However, if your industry or city has special requirements, check for local rules.

Overtime

Employees must receive 1.5x regular pay for hours worked over 40 per week (unless exempt).

Payday Laws

Texas requires that:

Non-exempt employees must be paid at least twice per month
Exempt employees (like salaried professionals) must be paid at least once per month

New Hire Reporting

Report all new hires to the Texas Attorney General’s office within 20 days of hire for child support enforcement.

Bonus Tips for Smooth Payroll Management

Keep your payroll calendar organized with reminders for tax due dates
Separate payroll funds into a different bank account
Audit payroll regularly to catch misclassifications or errors
Stay updated: tax rates and labor laws can change annually

Final Thoughts

Managing payroll in Texas doesn’t have to be overwhelming. With the right systems in place, you can stay compliant, keep your team happy, and focus on growing your business.

Written with the help of ChatGPT