Determine Whether You Need to Establish an Unemployment Tax Account

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Overview

The Texas Unemployment Compensation Act (TUCA) defines which employers must pay unemployment taxes. We refer to them as "liable employers." Liable Texas employers include sole proprietorships, partnerships, Limited Liability Companies (LLC), Professional Limited Liability Company (PLLC), Limited Partnership (LP), Limited Liability Partnerships (LLP), Professional Corporations (PC), Professional Associations (PA), corporations and foundations, associations, trusts, estates, banking institutions, political subdivisions, and governmental agencies.

Liable employers report employee wages and pay the unemployment tax based on state law under the Texas Unemployment Tax Act (TUCA). Liability for the tax is determined by several different criteria.

Once wages are paid, employers should register with the Texas Workforce Commission (TWC) within 10 days of becoming liable for Texas unemployment tax.

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Who is a Liable Employer

Employers who are subject to rules outlined in TUCA are liable to pay unemployment taxes and include any of the following:

  • An employing unit that is liable under the Federal Unemployment Tax Act (FUTA) and has Texas employees.
  • An employing unit that pays $1,500 or more in total gross wages in a calendar quarter, or has at least one employee during twenty different weeks in a calendar year regardless of the wages.  The employee does not have to be the same person for twenty weeks.  It is not relevant if the employee is full time or part time.
  • An individual or employing unit that acquires or otherwise receives, through any means, all or part of the organization, trade, business, or workforce of another that was a liable employer at the time of the acquisition.
  • An employing unit that is a non-profit organization as described under section 501(c) (3) of the IRS code and has four or more employees during 20 different weeks in a calendar year.
  • An employing unit that volunteers to become liable even though they do not currently meet the required criteria.
  • All political subdivisions of the state of Texas, including municipalities, counties, utility districts, public education institutions, etc.
  • An employing unit that paid cash wages of $1,000 or more in a calendar quarter for domestic services.
  • An employing unit engaged in farm and ranch labor if:

See Definition & Types of Employment for examples of services exempt from the definition of employment, and therefore not subject to unemployment tax.

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Who is Not a Liable Employer

Those Who Hire Independent Contractors

Independent contractors are not considered employees and therefore the employer is not liable for paying unemployment taxes for payments to those individuals.

A worker that is called contract labor and whose wages are reported using IRS Form 1099 may not be an independent contractor. Having the worker sign an “independent contractor” agreement does not necessarily make them an independent contractor. Workers must meet specific criteria to be classified as independent contractors.

A worker is an employee if the recipient of those services has direction and control of the worker; such as, when, where and how the work is done or provides the equipment necessary for the job or if the worker represents the employer while performing services.

Review our 20-point comparative approach Employment Status - a Comparative Approach PDF Estatus de Empleo – un Enfoque Comparativo PDF as a guide to determine if a worker is an employee or an independent contractor.

Employees Paid Through a Professional Employer Organization

If your employees are paid through a Professional Employer Organization (PEO), you are not liable to report their wages. A properly licensed PEO is considered the employer of all leased workers for purposes of the TUCA. PEOs report wages and pay contributions on all workers leased to client companies under the PEO's TWC account number.

“Staff leasing” is an arrangement by which employees of an entity known as a PEO are assigned to work at a client company. The term does not include: a temporary help service, independent contractor, or a temporary common worker employer, such as those who employ day laborers. In general an employer contracts with a PEO and re-leases some or all of their employees to the PEO. The employees are then leased back to the client company, usually to perform the same services for which they have been employed previously. The arrangement is intended to be of a long-term or continuing nature, rather than temporary or seasonal in nature.

All PEOs who intend to operate in the State of Texas must first obtain a Staff Leasing license from the Texas Department of Licensing and Regulation. In addition, each PEO is required to report quarterly on forms prescribed by TWC, the name, address, telephone number, federal employer identification number and standard industrial code number of the client company.

A PEO whose initial license application is not yet active, is denied or is revoked will not be considered the employer by TWC. Each client of an unlicensed PEO will be required to report their workers' wages and submit contributions under their own account number at their individually assigned tax rate. If a client's account has been in an "inactive" status for more than three calendar years and the company then resumes employment of their own workers, they will be reassigned a new account number and a tax rate of 2.7 percent.

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Last Verified: November 06, 2013

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