Payroll Taxes in Texas: A Complete Guide for Small Business Owners

Hiring your first employee is a major milestone for any Texas small business. It is also the moment when your tax obligations become significantly more complex. Payroll taxes are one of the most common areas where small business owners make costly mistakes — and the IRS takes payroll tax violations very seriously.

Texas Has No State Income Tax — But Federal Payroll Taxes Still Apply

One advantage of running a business in Texas: there is no Texas state income tax, which means no state income tax withholding from employee paychecks. However, you are still responsible for all federal payroll taxes and Texas unemployment tax.

The Five Payroll Tax Obligations

1. Federal Income Tax Withholding

Withhold federal income tax from each employee's paycheck based on their Form W-4 and the IRS withholding tables.

2. Social Security Tax (6.2% + 6.2%)

• Employee share: 6.2% withheld from wages (up to $168,600 for 2026)


• Employer share: 6.2% paid by you

3. Medicare Tax (1.45% + 1.45%)

• Employee share: 1.45% withheld from all wages


• Employer share: 1.45% paid by you

4. Federal Unemployment Tax (FUTA)

Paid entirely by the employer — nothing withheld from employees. Rate: 6% on the first $7,000 of wages, reduced to 0.6% effective rate with the Texas unemployment tax credit.

5. Texas Unemployment Tax (TWC/SUTA)

• New employer rate: 2.7% on the first $9,000 of wages per year


• Experienced employer rate: 0.23%–6.23% based on claims history


• Register at twc.texas.gov

Payroll Tax Deposit Schedule

| Lookback Period Liability | Deposit Frequency |

|---|---|

| $50,000 or less | Monthly (by 15th of following month) |

| Over $50,000 | Semi-weekly (1–3 business days after payroll) |

| $100,000+ in one day | Next business day |

Missing deposit deadlines results in penalties of 2%–15% of the unpaid amount.

Payroll Tax Forms and Deadlines

| Form | Purpose | Deadline |

|---|---|---|

| Form 941 | Quarterly payroll tax return | April 30, July 31, Oct 31, Jan 31 |

| Form 940 | Annual FUTA return | January 31 |

| Form W-2 | Employee wage statement | January 31 |

| Form 1099-NEC | Independent contractor payments | January 31 |

The Trust Fund Recovery Penalty: The Most Dangerous Payroll Tax Risk

The Trust Fund Recovery Penalty (TFRP) is one of the most severe penalties in the tax code. If payroll taxes are not deposited, the IRS can hold any responsible person personally liable for the unpaid employee share of taxes — even if the business is an LLC or corporation.

The TFRP equals 100% of the unpaid trust fund taxes. It is not dischargeable in bankruptcy.

Employee vs. Independent Contractor

Misclassifying employees as independent contractors is one of the most expensive payroll tax mistakes. If the IRS determines a contractor is actually an employee, you owe all back payroll taxes (both employer and employee shares), plus penalties and interest.

Get Help With Payroll in Texas

Texas ClearTax Solutions offers full-service payroll processing for small businesses throughout Texas — including payroll calculations, tax deposits, quarterly Form 941 filing, annual W-2 preparation, and TWC reporting. We serve clients statewide — 100% online.

Contact us today or call (469) 897-6175 to get your payroll set up right.