Texas payroll taxes: Your 2025 guide to staying compliant

Texas boasts one of the most dynamic business environments in the U.S., with over 3.3 million small businesses fueling its entrepreneurial ecosystem. In 2024, Texas recorded a gross domestic product (GDP) of approximately $2.71 trillion, making it the eighth-largest economy in the world if it were a country. The state’s leading industries include energy (oil, gas, and renewable energy), advanced manufacturing, aerospace and aviation, biotechnology, food and livestock, tourism and hospitality, and professional and corporate services, collectively creating a diversified and resilient landscape. This economic vitality makes Texas an appealing place to run a business, yet navigating its unique payroll tax regulations demands careful attention.

Now, let’s dive into the key aspects of Texas payroll taxes so you can keep your business compliant, on track, and set up for success.

Jump to:

• What are payroll taxes?
• Understanding Texas state payroll taxes
• Other important tax considerations
• Employer responsibilities for payroll taxes in Texas
• Filing payroll tax returns in Texas
• Common payroll tax mistakes in Texas (and how to avoid them)
• How to manage your small business payroll obligations
• Leverage payroll software for compliance in Texas

What are payroll taxes?

Payroll taxes are taxes based on wages, salaries, or other compensation that both employers and employees must pay. While income taxes are also withheld through payroll, payroll taxes specifically fund programs like Social Security, Medicare, and unemployment insurance.

Understanding Texas state payroll taxes

When starting a business in Texas, it is essential to understand both federal and state payroll taxes to remain compliant and avoid costly mistakes.

Federal payroll taxes

Payroll taxes are mandatory and encompass both federal and state requirements.

Federal payroll taxes include:

• Federal income tax: This is withheld from each employee's paycheck based on their W-4 form and the current IRS tax brackets. You'll be responsible for calculating the correct amount, withholding it, and then sending it to the IRS. 
• Social Security and Medicare taxes: Both of these taxes have a portion paid by the employee and a matching portion paid by you, the employer. For Social Security, the combined rate is 12.4% on the first $176,100 of wages in 2025. For Medicare, it's 2.9% on all wages, with an extra 0.9% for higher earners. You'll withhold the employee's portion and match it. 
• Federal Unemployment Tax (FUTA): This is paid solely by you at a rate of 6% on the first $7,000 of each employee's wages. However, most employers get a 5.4% credit, reducing the rate to 0.6%. The graphic below lists some best practices for managing your FUTA obligations. 

Texas state payroll taxes

In addition to all federal payroll, you must also cover state-specific payroll taxes as a Texas employer.

• Texas Unemployment Insurance (UI) Tax: This is the only state payroll tax in Texas. It's entirely employer-paid and levied by the Texas Workforce Commission (TWC) to fund the Texas Unemployment Compensation (TUC) program. In 2025, Texas UI tax rates range from 0.25% to 6.25% on the first $9,000 of each employee's wages. New employer rates typically start at 2.7% until they establish experience and receive a new rate from the TWC.

Texas local payroll taxes

Some counties or cities in Texas may impose unique local payroll taxes, which you would need to cover in addition to federal and state payroll taxes. These taxes can vary based on the location of your business. Here are a few ways to determine if there are any local payroll taxes you could be liable for:

1. Check with your local government to find out if your business is subject to any local payroll taxes. Your city or county government can provide the most up-to-date information on applicable rates and regulations.
2. Consult a tax professional if you need clarification on local payroll tax requirements or assistance with compliance. An accountant specializing in Texas payroll taxes can help you identify any local taxes that apply to your business and ensure you meet all your obligations.

Other important tax considerations

Multiple locations

If your business has employees working in multiple cities or counties, you may be subject to different local payroll taxes for each location.

Changing rates

Local payroll tax rates can change over time, so it's important to stay informed about any updates that may affect your business. For example, the Texas Workforce Commission recalculates the Texas UI tax rate employers must pay annually, using several factors to determine the year's rate. It's vital to stay informed about these changes and apply calculations based on your current rate.

Employer responsibilities for payroll taxes in Texas

As a Texas employer, you're responsible for managing a complex array of federal and state payroll taxes, which involves careful calculation, timely withholding, and accurate reporting to various government agencies. Here’s an overview of what you should know.

Registering for payroll taxes

Texas state regulations, in accordance with the Texas Unemployment Compensation Act, require employers to complete unemployment tax registration within 10 days of becoming liable for this payroll tax. You may be able to register online; the Texas Workforce Commission website's Frequently Asked Questions page outlines the criteria for this. Unlike other states, Texas doesn't have income tax. Therefore, the registration process is only for reporting and paying the employer-paid Texas UI tax. As an employer, you’re required to register and pay the UI tax if you paid at least $1,000 for domestic labor ($6,500 for ranch or farm labor) in any given calendar quarter. To pay the tax, you must first register. Here are the three steps you need to take:

• Get an Employer Identification Number (EIN): Before registering with the state and getting your Texas payroll tax rate, you need an EIN from the Internal Revenue Service (IRS). This nine-digit number identifies your business for state and federal tax purposes. It’s required to successfully complete the registration process. You can apply for an EIN directly through the IRS website.
• Register with the Texas Workforce Commission: With your EIN in hand, you can register with the Texas Workforce Commission (TWC), the organization that administers the payroll taxes in Texas. You can complete the registration process online through the Unemployment Tax Registration (UTR) portal. The TWC recommends online registration for security, speed, and simplicity. However, if you can’t use the UTR portal, you can complete and submit Form C-1 (Status Report).
• Report New Hires: After registering your business, you must report new hires to the Texas Office of the Attorney General, which you can do entirely online. Alternatively, you can report new hires by mailing the Texas New Hiring Reporting form or contacting the Child Support Division of the Office of the Attorney General via phone. You must report new hires within 20 calendar days of the hire date to avoid penalties.

Calculating payroll taxes

Accurately calculating payroll taxes is essential to avoid penalties. You have a few options for calculating applicable taxes while avoiding errors:

• Check government websites: The TWC website offers numerous online resources, including a comprehensive Texas Guidebook for Employers. You can also find a computation worksheet for unemployment tax. This Texas payroll tax calculator can help you determine taxes owed, interest, and possible penalties.
• Payroll software: Some small business software payroll programs have built-in Texas tax tables that automate calculations, saving you time and minimizing the chance for errors.
• Professional services: If you prefer to outsource payroll, a professional payroll service can handle everything for you.

Whichever method you choose, make sure you stay updated on the current tax rates and wage limits, as these can change every year.

Withholding state payroll taxes

Once you learn how to figure payroll taxes in Texas, you must determine how much you'll need to pay. Remember: Texas does not have a state income tax. Therefore, there's nothing you need to withhold from employee pay other than the Federal taxes. The only payroll tax in Texas is the state's Unemployment Insurance tax, which is an obligation that employers must pay. How much is the payroll tax in Texas? Here's a quick breakdown of how to determine the amount to pay:

Texas Unemployment Insurance (UI) Tax: The UI tax rate varies based on the age of your business and several factors. The TWC calculates and assesses a new tax rate annually, typically providing that information to employers at the end of the calendar year. You can find yours when you log into the Unemployment Tax Services (UTS) system. New employers typically receive an introductory rate of 2.7% for the first four quarters of doing business. 

• Example: Let's say you're a new employer with an employee who earns $12,000 in wages during the first quarter of the year. Your UI tax obligation for that single employee would be $243 during your first-quarter report. Why that amount? The Texas UI Tax only applies to the first $9,000 of an employee's annual wages, at a rate of 2.7% for new employers. Therefore, 2.7% of $9,000 is $243. Because that employee already crossed the wage base for the year, you would owe no more UI taxes on that employee's earnings for the rest of the year.

By applying these calculations to each paycheck, you ensure accurate withholdings and compliance with state requirements. 

Remitting state payroll taxes

Next, you'll need to submit Texas payroll taxes (UI tax payments) to the Texas Workforce Commission. The easiest way to do this is through the Unemployment Tax Services portal. You must file and pay this tax every quarter.

Filing payroll tax returns in Texas

In Texas, employers must comply with quarterly and annual payroll tax return requirements to fulfill their state and federal obligations. Here's a breakdown of 2025 requirements:

Quarterly requirements