Hiring Your First Employee as a General Contractor in Texas

Every successful Texas general contractor eventually hits the ceiling of what they can accomplish alone. When you’re turning down work because you can’t staff it, the time to hire has arrived. But bringing on your first W-2 employee is a significant legal and administrative step — getting it right from the start protects you and your business.

W-2 Employee vs. 1099 Subcontractor: Know the Difference

Before hiring, understand the legal distinction. The IRS and Texas Workforce Commission use specific criteria to determine whether a worker is an employee or an independent contractor. Getting this wrong has serious consequences.

Signs of an employee (W-2):

• You control when, where, and how the work is done
• The worker works exclusively or primarily for your business
• You provide tools and equipment
• The work is integral to your business (not occasional or peripheral)
• You set their work schedule

Signs of an independent contractor (1099):

• They operate their own business, work for multiple clients
• They control how the work is performed
• They bring their own tools, materials, and expertise
• They invoice you per project

Why it matters: Misclassifying employees as 1099 contractors exposes you to back taxes (both employer and employee share of FICA), penalties from the IRS, and workers’ compensation violations in Texas. The Texas Workforce Commission actively investigates misclassification. When in doubt, treat the worker as an employee.

Step 1: Set Up Your Employer Account

Before running a single paycheck, complete these registrations:

• IRS Form SS-4 (EIN): If you don’t already have an EIN, apply at irs.gov (free, instant online)
• Texas Workforce Commission account: Register at twc.texas.gov for Texas unemployment insurance (TWC UI) — required for any employer in Texas
• Federal tax deposit schedule: Once you have an employee, you are required to deposit payroll taxes (FICA + withheld income tax) on a specific schedule (monthly or semi-weekly depending on total liability)

This setup takes approximately 2–3 hours and is largely done online.

Step 2: Set Up Payroll

Options for Texas contractor payroll:

Payroll software/service:

• Gusto — Most popular for small contractors. Full-service payroll, direct deposit, automatic tax filings, year-end W-2s. $45–$80/month for a small team.
• QuickBooks Payroll — Works best if you’re already using QuickBooks for accounting
• ADP Run or Paychex — More enterprise-oriented, more expensive, but well-established

DIY with spreadsheets: Technically possible but not recommended. Payroll tax calculations, deposit schedules, and quarterly filings (941, TWC quarterly) are complex and penalty-prone for errors. Payroll software cost is minimal insurance against a tax mistake.

Step 3: Workers’ Compensation Insurance

Texas is the only state in the US where workers’ compensation insurance is not mandatory for private employers. However, this does not mean you should skip it.

Why Texas GCs need workers’ comp:

• Without workers’ comp, employees can sue you directly for work injuries — and recover significantly more than a workers’ comp benefit
• Most commercial clients and GCs require subcontractors to carry workers’ comp or the client’s own policy covers them (at your cost)
• Workers on a job site that causes injury to others may create liability that transfers to you without proper coverage

Texas workers’ comp cost: Typically 3%–10% of payroll for construction workers, depending on the specific class code (carpenter, laborer, equipment operator) and your claims history. For a $60,000/year employee, budget $3,000–$6,000 annually for workers’ comp premium.

Contact your general liability insurer first — they often write workers’ comp on the same policy for simplicity. Texas-licensed insurance agents specializing in contractors can shop multiple carriers.

Step 4: Required Employment Documents and Compliance

Before the first day:

• Form I-9 — Verify employment eligibility. Employee must present identity documents (driver’s license + Social Security card, or passport). You must retain Form I-9.
• Form W-4 — Employee claims withholding allowances. Keep on file, use to calculate federal income tax withholding.
• Texas Employer’s Poster — Required Texas and federal employment law posters must be displayed at your workplace (or worksite). Available at Texas Workforce Commission — free download.

Ongoing compliance:

• Report new hires to Texas Attorney General New Hire Reporting within 20 days of start date (required by law)
• Issue W-2 forms by January 31 of the following year
• File quarterly 941 (federal) and TWC quarterly wage reports

Step 5: Set Employee Compensation Competitively

Texas general construction labor rates (2026 approximate):

• General laborer: $18–$25/hour
• Skilled carpenter/framer: $25–$38/hour
• Project manager: $55,000–$90,000/year salary

Pay what the market requires to attract reliable, skilled workers. Chronically turning over employees due to below-market pay is far more expensive than paying market rate — accounting for recruiting time, training time, and project delays during onboarding.

Getting the Work to Justify Payroll

Adding an employee only makes financial sense if you have — or can generate — the work volume to justify it. House Escort helps Texas general contractors find homeowner clients who need project work, providing the lead pipeline that makes expanding your team a profitable decision.

Get More GC Leads on House Escort →

Frequently Asked Questions

Is workers’ compensation required for a Texas general contractor?

Workers’ comp is not legally required for private employers in Texas — it is optional. However, most commercial clients, GCs, and project owners require it in their subcontractor agreements. Without workers’ comp, injured employees can sue you in civil court and potentially recover damages that far exceed what a standard comp benefit would provide. For any business with employees doing physical construction work, carrying workers’ comp is strongly advisable.

How do I calculate payroll taxes for my first employee in Texas?

Federal payroll taxes include: Social Security (6.2% employee + 6.2% employer on wages up to the annual limit), Medicare (1.45% each side, no limit), and federal income tax withholding based on the W-4. Texas has no state income tax. The employer also pays Federal Unemployment Tax (FUTA — 0.6% of first $7,000 wages per employee) and Texas Unemployment (TWC — rate varies based on experience, typically 1%–3.5% of first $9,000). Payroll software handles all calculations automatically.

Can I pay my employee as a 1099 to avoid payroll taxes?

Only if the worker genuinely qualifies as an independent contractor under IRS and TWC criteria (described above). If you control how and when they work, provide their tools, and they work primarily for you, they are legally an employee regardless of what you call the arrangement. The penalties for misclassification — back payroll taxes, interest, and penalties — far exceed the cost of proper payroll processing.

What is the minimum wage in Texas?

Texas follows the federal minimum wage — $7.25/hour. In construction and skilled trades, market wages are significantly above this minimum. Paying competitive wages (see rates above) is important for attracting reliable workers in Texas’s competitive construction labor market.