How do I Add Functionality to Sprite Buttons?

Several options:

1. Use Button object and style it with CSS. But this is not a good choice for many games, because HTML elements are rendered above the canvas (or will require a special HTML layer), can "steal" mouse focus and have a few other annoying quirks.

2. Use a sprite with several frames or animations. If mouse cursor over the sprite -> Set frame 1, Else set frame 0. On sprite clicked -> Set animation "clicked" and so on.

3. Use an addon like ProUI. (also not recommended unless you require lots of other UI controls)

Is it possible to add text to a sprite inside of the editor screen, or do I actually need this separate sprite text layer on top of it as a separate item?

You need to add a text object on top of the button sprite, yes. You can add them to a hierarchy, then the text will scale with the button, move with the button etc.

And also, what is preventing this layer 2 from appearing when I click on the button (while obviously hovering over it too)?

That's why I suggested to use a different animation when the button is clicked. Something like this:

Button set animation to "clicked"
Wait 0.1 seconds
Button set animation to "idle"

It's one of the most basic actions, it's definitely available in free version.

Make sure to disable "Use simplified user interface" in program settings.

Nevermind--that was an easy fix! I'm all set :) Thank you so much for the help this week.