Business Owner's Guide to the Texas Workforce Commission and Unemployment Taxes
The Texas Workforce Commission (TWC) might not be a well-known organization in the Lone Star State, but it has a wide range of responsibilities. If it’s employment-related, there’s a good chance the TWC is involved in some way. One of its biggest tasks is handling Texas’ unemployment program, which includes collecting unemployment taxes from employers.
This guide takes a broad look at the TWC, including what it does and how it can address various problems that many Texas businesses face. There will also be a special focus on answering unemployment tax questions employers commonly have. Having problems with the TWC and want help now? Then, use TaxCure to search for a Texas-based tax pro who has experience with this agency.
What Does the Texas Workforce Commission Do?
The TWC’s role in Texas employment can be categorized into three main areas: workforce development, legal compliance, and running the state’s unemployment benefits system.
With respect to workforce development, there are a plethora of programs and services handled by the TWC. Some of the more notable ones include:
- Veteran’s Services
- Skills Development
- Senior Community Service Employment program
- Child Care Services program
- Apprenticeship program
One of the TWC’s biggest jobs is administering and enforcing several Texas laws, including:
- Texas Unemployment Compensation Act (deals with unemployment benefits)
- Texas Payday Law (deals with unpaid wages and how workers get paid)
- Chapter 21 of the Texas Labor Code (deals with employment discrimination)
- Chapter 51 of the Texas Labor Code (deals with child labor)
- Chapter 62 of the Texas Labor Code (deals with minimum wage)
How the TWC Deals With Common Employment Issues
The vast majority of employers in Texas try to obey the law. If not because it’s the right thing to do, at the very least, it’s because following the law avoids unexpected costs and headaches that can make any manager or owner lose sleep at night. However, several issues commonly get brought to the TWC’s attention, whether by a whistleblower, employee, or confused business owner.
Here are some of the most common employment issues and tips to help employers avoid or resolve these issues:
Most workers can be classified as employees or independent contractors, and employers need to make sure that they classify their workers correctly. This distinction matters because it can affect the legal exposure and finances of an employer. For example, as a general rule, employers are liable if their employees commit a tort during the course of their job duties. But if independent contractors commit a tort, then employers usually aren’t liable.
Financially, it’s usually cheaper for an employer to hire a worker as an independent contractor instead of an employee. This is because an independent contractor typically doesn’t have the right to minimum wage or overtime pay. Additionally, employers don’t have to pay payroll taxes (including unemployment taxes) for independent contractors.
How to Avoid Worker Misclassification in Texas
The best way to avoid worker misclassification issues is to properly classify workers from the start. The TWC uses a Comparative Approach test for determining if a worker has been properly classified and employers can apply that test relatively easily in most cases.
When it comes to worker classification, a rule of thumb is that the more control an employer has over the worker (such as how work is done, how much training the employer provides, and if the employer provides the tools and equipment to the worker), then the more likely the worker is an employee and not an independent contractor.
If an employer has questions when trying to classify a worker, they can contact their nearest TWC unemployment tax office for assistance. Additionally, talking to an employment law attorney may be necessary for more complicated questions.
Wage and Hour Violations
Probably the most prevalent wage and hour violation employers have to deal with is a claim for unpaid wages. If an employee believes they haven't been paid properly, they can submit an unpaid wage claim to the TWC online or by mail or fax:
Texas Workforce Commission
Wage and Hour Department
101 E 15th St, Rm 514
Austin, TX 78778-0001
After the claim gets filed with the TWC, the TWC mails a copy of the claim and an Employer Response to Wage Claim form to the employer. An employer then has 14 days to respond to the claim by mail, email, or fax using the contact information listed on the Employer Response to Wage Claim form.
When the TWC receives the employer’s response to the unpaid wage allegations, they will investigate the claim. Sometimes the TWC will reach out to the employee or employer for more information. The TWC makes a decision in the form of a Preliminary Wage Determination Order, which can be appealed by the employee or employer. This appeal must come within 21 days of the Preliminary Wage Determination Order decision notice.
Assuming no party files an appeal and the original decision was in the employee’s favor, then the decision becomes final and the TWC Wage and Hour Collections Unit steps in to enforce the order.
How to Prevent a Wage and Hour Claim With the TWC
As with many other problems in life and the law, preventing a wage and hour claim is almost always a lot easier and cheaper than handling one after an employee has filed a claim with the TWC. Some unpaid wage claims can’t be prevented, such as those coming from disgruntled employees. But many others can. Here are some steps employers can take to avoid preventable unpaid wage claims:
- Make sure paychecks are sent on time; use a payroll service if necessary.
- Be careful when assigning tasks to volunteers and interns.
- Keep careful records of documents used to calculate employee compensation, such as timesheets and invoices.
- Ensure management has the proper training and up-to-date information about federal, state, and local pay laws.
If there’s a question about paying an employee and no one at work seems to know the answer to that question, consider talking to an attorney. A simple telephone call and a few hundred dollars may be a very small price to avoid expensive problems in the future.
You should also reach out to a tax attorney who has experience with the TWC if you want to appeal a decision or dispute an employee's claim.
One of the TWC’s biggest areas of responsibility is handling the unemployment benefits system in Texas. In an effort to make it as fair as possible, while also avoiding fraud and abuses, the unemployment benefits application process is far from simple. So it’s understandable when there’s confusion or other problems, like the wrongful denial of unemployment benefits.
Another common area of confusion, at least for many employers, is how to handle their unemployment tax obligations. Much of the money used to pay out unemployment benefits comes from taxes that employers pay into the Unemployment Compensation Trust Fund.
Even though employers might already know all of this, they might not fully understand how to meet their unemployment tax payment obligations. The following section attempts to answer some of the most commonly asked questions employers have about unemployment taxes.
FAQs: Unemployment Insurance Taxes and the TWC
Do All Employers Have to Pay Unemployment Taxes in Texas?
No, but most do. For purposes of the Texas Unemployment Compensation Act, three main types of employers have to pay unemployment taxes:
- Domestic employers who hire workers who typically work in or around the home, like gardeners, nannies, and housekeepers.
- Agricultural employers who have workers who usually work on a farm or ranch. These workers are involved in the maintenance, operation, or management of the production of livestock and/or crops.
- Regular employers who hire workers who don’t qualify as agricultural or domestic employees.
Do Domestic Employers Need to Pay Unemployment Taxes?
A domestic employer must pay unemployment taxes if they do one of the following:
- Pay $1,000 or more in total wages over a three-month period; or
- Take over a household with domestic employees and that household is required to pay unemployment taxes.
Do Agricultural Employers Need to Pay Unemployment Tax?
An agricultural employer must pay unemployment taxes if they do any of the following:
- Hire three or more employees for a minimum of one hour a day for 20 weeks in a year;
- Pay $6,250 or more in total wages over a three-month period;
- Hire seasonal workers for an orchard, truck farm, or vineyard;
- Hire seasonal or migrant workers who work for a labor agent, ranch operator, or farmer; or
- Take over an organization, workforce, trade, or business that is required to pay unemployment taxes.
Do Regular Employers Need to Pay Unemployment Taxes?
A regular employer must pay unemployment taxes if they do any of the following:
- Pay $1,500 or more in total wages over a three-month period;
- Hire one or more employees for a minimum of one hour a day for 20 different weeks in a year;
- Have employees that are subject to the Federal Unemployment Tax Act;
- Are an IRS-designated 501(c)(3) organization and have four or more employees for 20 different weeks in a year; or
- Take over or acquire an organization, workforce, trade, or business that is required to pay unemployment taxes.
Employers do not have to pay unemployment insurance taxes for:
- Independent contractors
- Employees paid through a professional employer organization
How Do Eligible Employers Pay Unemployment Taxes?
Within 10 days of becoming required to pay unemployment taxes, an employer should register an unemployment tax account with the TWC. This registration process is free and requires an employer to provide information about who owns the organization and its operating locations. At the end of the registration process, the employer will receive a TWC Tax Account Number.
An employer can then use the unemployment tax account to pay the unemployment taxes online by using ACH debit or credit card. Unemployment taxes can also be paid by mailing a check to the TWC, but only if the employer has an approved hardship waiver. There’s also the TEXNET electronic funds transfer system, which is optional for most employers, but required for employers who pay more than $250,000 in taxes for a fiscal year.
When Do Employers Pay Unemployment Taxes?
Most employers submit wage reports and make tax payments quarterly. These reports and payments are made in the month following the calendar quarter. For instance, for first-quarter unemployment taxes, an employer will submit its quarterly report and tax payment by April 30.
Domestic employers can sometimes choose to report and pay their unemployment taxes annually. These reports and payments are due January 31.
Which Wages Must Employers Report to the TWC?
In most situations, all wages should be reported. However, wages don’t need to be reported if they are paid to a sole proprietor or partner.
How Much Does an Employer Have to Pay in Unemployment Taxes?
Only the first $9,000 paid to an employee for a calendar year is subject to unemployment taxes. In situations where an employee has made more than $9,000 in the first quarter, the employer may still need to file reports for the second, third, and fourth quarters.
As for the unemployment insurance effective tax rate, it can range from 0.23% to 6.23% for 2023. The reason for this wide range is because the effective tax rate consists of five components:
- General tax rate: this is based on the amount of unemployment benefits the TWC has paid to a particular employer’s former employees.
- Replenishment tax rate: this is a flat rate paid by all eligible employers. In 2023, this was 0.13%.
- Unemployment obligation assessment rate: this portion of the overall unemployment tax rate exists to pay for the bond obligations and interest payments on loans used to help fund the unemployment benefit system.
- Deficit tax rate: this tax percentage gets added for years when the Unemployment Compensation Trust Fund falls below a minimum level.
- Employment and training investment tax assessment: this is 0.10% of wages paid by an employer and the money goes to an employment and training investment holding fund.
What Is a Reimbursing Employer?
A reimbursing employer refers to a government or non-profit employer that doesn’t pay any unemployment taxes annually or quarterly. But they do have to reimburse the TWC for unemployment benefits paid out to the reimbursing employer’s former employees who receive unemployment payments.
What Happens if an Employer Is Late With Paying Unemployment Taxes or Reporting Wages?
An employer could have to pay a late report penalty and/or interest for a late payment. The late payment interest rate is 1.5% for each month the payment is late, with a maximum interest rate of 37.5%
The late report penalty is $15.00 if the report is filed within 15 days of the due date. For longer delays, a special formula applies. To provide a rough idea of how much this penalty could be, employers who file reports during or after the third month in which the report was due (this represents the maximum penalty formula) are subject to the following penalty formula
Penalty = taxable wages x 0.35% + $90.00
Do Employers Have Other Obligations Concerning Unemployment Taxes?
Yes. Some of the more important obligations include informing the TWC of a change in business status, displaying necessary workplace posters, and reporting new hires (within 20 days of the hire date) to the Employer New Hire Reporting Operations Center, which is part of the Texas Office of the Attorney General.
Find Assistance with Texas Unemployment Tax Issues
If you aren’t sure about your unemployment tax obligations, it might be a good idea to get professional tax help. Whether you’re trying to prevent problems or are already facing interest and penalty payments, there’s a Texas tax pro that can help.