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What payroll taxes does a Texas employer need to handle?

Texas employers have fewer payroll tax obligations than most states because there’s no state income tax. That said, “fewer” doesn’t mean “few.” There are still several taxes you’re responsible for calculating, withholding, depositing, and reporting on schedule.

Federal income tax withholding is the first one. You withhold this from every employee’s paycheck based on their W-4 form. The amount depends on their filing status, number of dependents, and any additional withholding they request. You don’t pay this tax yourself. You’re just collecting it and sending it to the IRS on the employee’s behalf. Getting the withholding wrong means your employees end up owing money or overpaying at tax time.

FICA taxes are the big one for employers because you’re paying half. Social Security tax is 6.2% from the employee and 6.2% from you as the employer on wages up to the annual wage base (which is $176,100 for 2025). Medicare tax is 1.45% from the employee and 1.45% from you with no wage cap. There’s also an additional 0.9% Medicare tax on employee wages over $200,000, but that’s employee-only. You don’t match that portion.

Federal unemployment tax (FUTA) is paid entirely by the employer. The rate is 6.0% on the first $7,000 of wages per employee per year. However, if you’re current on your Texas unemployment taxes, you get a credit that reduces the effective FUTA rate to 0.6%. That works out to a maximum of $42 per employee per year. It’s not a large amount individually, but it adds up if you have a sizable crew.

Texas unemployment insurance (SUTA) is handled through the Texas Workforce Commission. New employers typically start with a rate of 2.7% on the first $9,000 in wages per employee. Your rate adjusts over time based on your claims history. If you lay people off or have employees successfully file unemployment claims, your rate goes up. Keep a stable workforce and it goes down. You pay this quarterly to the TWC along with a quarterly wage report.

Deposit schedules matter and missing them triggers penalties quickly. The IRS determines whether you deposit federal payroll taxes monthly or semi-weekly based on your total tax liability during a lookback period. Most small businesses start on a monthly schedule. TWC payments are quarterly. Set calendar reminders or use payroll system setup to automate deposits so nothing slips through the cracks.

You also need to file Form 941 with the IRS each quarter, reporting wages paid and taxes withheld. At year end, you file W-2s for every employee and W-3 summary forms. Texas doesn’t require state-level W-2 filing since there’s no state income tax, which saves you one step.

One thing Texas employers sometimes overlook is workers’ compensation. Texas is one of the few states where workers’ comp insurance is optional. But “optional” doesn’t mean “unnecessary.” If an employee gets hurt on the job and you don’t carry coverage, you lose several legal protections and open yourself up to lawsuits. Most industries in the Houston area carry it regardless.

The payroll tax landscape in Texas is genuinely simpler than states like California or New York. But the federal obligations alone are enough to create problems if you’re not tracking them. A missed deposit or a late 941 filing results in penalties that start immediately with no grace period. If you’re running payroll manually or handling it yourself, working with a Houston fractional CFO or payroll professional can help you make sure everything is set up correctly from the start and stays compliant as your team grows.

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