What Texas Payroll Taxes You Owe and How to Calculate Them

Texas has no state income tax, which means you do not withhold state income tax from employee paychecks. However, you still owe federal income tax withholding, Social Security tax (6.2%), Medicare tax (1.45%), and federal unemployment tax (FUTA). You may also owe Texas unemployment insurance tax (SUTA) if you have employees. The calculation starts with gross pay, then subtracts what the employee owes, then adds what you owe as the employer.

The process is the same whether you run payroll yourself or use software. You need the employee's W-4 form to know how much federal income tax to withhold, their Social Security number to report to the IRS, and your federal Employer Identification Number (EIN). Texas requires you to register with the Texas Workforce Commission (TWC) to pay unemployment tax, even if you have only one employee.

Key Takeaways

  • Texas has no state income tax, so you withhold only federal income tax, Social Security, Medicare, and FUTA from paychecks.
  • You must register with the Texas Workforce Commission to pay unemployment insurance tax if you have any employees.
  • Federal income tax withholding depends on the employee's W-4 form and their gross pay for the pay period.
  • Social Security and Medicare taxes are calculated as a fixed percentage of gross pay: 6.2% and 1.45%, with a cap on Social Security wages.
  • You owe the same percentage as the employee for Social Security and Medicare, plus FUTA at 0.6% on the first $7,000 of each employee's annual wages.

Federal Income Tax Withholding Based on W-4 Form

The employee's Form W-4 tells you how much federal income tax to withhold from each paycheck. The W-4 includes the employee's filing status (single, married, head of household), number of dependents, and any extra withholding they request. You use this information with IRS withholding tables or software to calculate the amount.

The IRS publishes updated withholding tables each year. You can find them in Publication 15-T (Federal Income Tax Withholding Methods). The tables vary by pay frequency (weekly, biweekly, semimonthly, monthly) and filing status. If an employee does not provide a W-4, you must withhold as if they are single with no dependents, which results in the highest withholding.

Employees can update their W-4 at any time, and the change takes effect on the next paycheck. Keep the signed W-4 on file for at least four years in case the IRS audits your payroll records.

Social Security and Medicare Tax Calculation

Social Security tax is 6.2% of gross wages, up to a wage base limit set each year by the Social Security Administration. For 2024, the wage base limit is $168,600, meaning you stop withholding Social Security tax once an employee reaches that amount in a calendar year. Medicare tax is 1.45% of all gross wages with no limit. An additional 0.9% Medicare tax applies to employees earning over $200,000 (single) or $250,000 (married filing jointly), and you withhold it from their paychecks.

You also pay the employer's share: 6.2% for Social Security and 1.45% for Medicare. The employer's Social Security tax also stops at the wage base limit. These are separate from what you withhold from the employee's paycheck — you owe them in addition to withholding.

Calculate these taxes on gross pay before any deductions (except pre-tax retirement contributions like 401(k), which reduce the taxable wage base). If an employee contributes to a traditional 401(k), subtract that amount from gross pay before calculating Social Security and Medicare.

Federal Unemployment Tax (FUTA) Calculation

FUTA is a federal tax you pay as the employer; you do not withhold it from employee paychecks. The standard rate is 6% of the first $7,000 of each employee's wages in a calendar year. However, you receive a credit of up to 5.4% if you pay state unemployment tax on time, which reduces your FUTA rate to 0.6% in most cases.

Calculate FUTA only on wages you pay to each employee up to $7,000 per year. Once an employee reaches $7,000 in annual wages, you stop calculating FUTA on their additional wages for that year. You report FUTA quarterly on Form 941-X or annually on Form 940, depending on how much you owe.

Texas Unemployment Insurance Tax (SUTA) Calculation

Texas requires you to register with the Texas Workforce Commission (TWC) and pay unemployment insurance tax on your employees' wages. The tax rate depends on your industry and your experience rating — a measure of how many claims your former employees have filed. New employers typically pay the standard rate, which varies by industry but is usually between 0.31% and 5.4% of the first $9,000 of each employee's annual wages.

You do not withhold SUTA from employee paychecks; you pay it from your business account. The TWC sends you a notice each year showing your rate and wage base. You report SUTA quarterly using the Texas Employer's Quarterly Report (Form TXCN-101) and pay by the due date, which is usually the last day of the month following the end of the quarter.

If you do not register with the TWC or fail to pay on time, you face penalties and interest. The TWC can also assess back taxes and file a lien against your business. Register before you hire your first employee to avoid these consequences.

Step-by-Step Payroll Tax Calculation Example

Assume an employee earns $3,000 in gross pay for a biweekly paycheck, is single with no dependents, and has not reached the Social Security wage base limit. Using the 2024 IRS withholding tables for biweekly pay, federal income tax withholding is approximately $275. Social Security tax is $3,000 × 6.2% = $186. Medicare tax is $3,000 × 1.45% = $43.50. Total withholding is $275 + $186 + $43.50 = $504.50. The employee's net pay is $3,000 − $504.50 = $2,495.50.

As the employer, you owe Social Security tax of $186, Medicare tax of $43.50, and FUTA of $3,000 × 0.6% = $18 (assuming the 5.4% credit applies). If your SUTA rate is 2%, you owe $3,000 × 2% = $60. Your total employer payroll tax for this employee is $186 + $43.50 + $18 + $60 = $307.50. You deposit both the employee withholding ($504.50) and your employer share ($307.50) to the IRS and TWC according to their schedules.

Deposit Schedules and Reporting Deadlines

Federal income tax, Social Security, and Medicare taxes must be deposited with the IRS on a schedule determined by your total tax liability. Most small employers deposit monthly by the 15th of the following month. Larger employers deposit semiweekly or more frequently. You can find your deposit schedule in IRS Publication 15 or by contacting the IRS.

You report federal payroll taxes quarterly on Form 941 (Employer's Quarterly Federal Tax Return), due the last day of the month following the end of the quarter. You report FUTA annually on Form 940, due January 31. Texas unemployment taxes are reported quarterly on Form TXCN-101, due by the last day of the month following the end of the quarter.

Missing a deposit or filing deadline results in penalties and interest. The IRS charges a failure-to-deposit penalty ranging from 2% to 15% depending on how late the deposit is. The TWC charges similar penalties for late SUTA payments. Set calendar reminders for each deadline and consider using payroll software to automate calculations and track due dates.

Tools and Resources for Payroll Tax Calculation

The IRS provides free withholding calculators and tables on its website (irs.gov). Publication 15-T contains the federal income tax withholding tables for all pay frequencies. The TWC website (twc.texas.gov) has SUTA rate tables, registration forms, and quarterly reporting instructions. Many payroll software providers (such as QuickBooks, ADP, or Gusto) calculate taxes automatically based on employee information and your business location.

If you use payroll software, the software calculates withholding and employer taxes, tracks wage bases and annual limits, and generates deposit coupons and quarterly reports. This reduces the risk of calculation errors and missed deadlines. However, you remain responsible for the accuracy of the data you enter and for making deposits and filings on time.

Frequently Asked Questions

Do I have to withhold state income tax in Texas?

No. Texas has no state income tax, so you do not withhold state income tax from employee paychecks. You withhold only federal income tax, Social Security, Medicare, and FUTA.

What happens if I do not register with the Texas Workforce Commission?

The TWC can assess back SUTA taxes, penalties, and interest. If you continue to operate without registering, the TWC can file a lien against your business and pursue collection action. Register before you hire your first employee to avoid these consequences.

Can I use last year's withholding tables for this year?

No. The IRS updates withholding tables each year to account for inflation and tax law changes. Using outdated tables results in incorrect withholding and potential penalties. Download the current year's Publication 15-T from irs.gov before each calendar year begins.

What is the wage base limit, and does it apply to all taxes?

The Social Security wage base limit (currently $168,600 for 2024) is the maximum amount of wages subject to Social Security tax per employee per year. Medicare tax has no wage base limit. FUTA and SUTA have their own wage base limits ($7,000 for FUTA, $9,000 for SUTA in Texas), which are separate from the Social Security limit.

If I pay an employee in cash, do I still owe payroll taxes?

Yes. Payroll taxes are owed on all compensation, regardless of how you pay it. You must withhold federal and Social Security taxes and pay employer taxes even if you pay in cash. Failing to report cash wages is tax evasion and can result in criminal penalties.