How to Calculate Payroll Taxes in Texas: Rates, Deposits, and Penalties

To calculate payroll taxes in Texas, you work with four taxes: federal income tax withholding, Social Security and Medicare (FICA), federal unemployment tax (FUTA), and the state unemployment tax administered by the Texas Workforce Commission. Texas has no state income tax, so nothing comes out of the paycheck at the state level. Two of the four (FUTA and Texas SUTA) are paid entirely by you as the employer and never deducted from wages.

What You Need Before You Start

Every payroll run begins with gross pay: the total the employee earned before any deductions, including hourly wages, salary, commissions, and bonuses. Texas Labor Code Section 61.001 defines wages broadly to cover compensation computed on a time, task, piece, or commission basis.1State of Texas. Texas Labor Code Chapter 61 – Payment of Wages

You also need a current Form W-4 for each employee. The W-4 tells you the filing status and adjustments that drive federal withholding. Employees who submitted a W-4 before 2020 do not have to file a new one, and you keep using their most recent form.2Internal Revenue Service. FAQs on the 2020 Form W-4 If a new hire never turns one in, treat them as single with no adjustments.

Keep these 2026 figures at hand:

Pull your annual tax rate notice from the Texas Workforce Commission as well. It carries the SUTA rate the TWC assigned to your account for the year.6Texas Workforce Commission. Your 2026 Tax Rates

Social Security and Medicare

Social Security tax is 6.2% of gross pay from the employee, matched by 6.2% from you. In 2026 the tax applies only to the first $184,500 an employee earns during the calendar year. Once wages cross that line, both sides stop paying Social Security tax on that employee’s remaining pay for the year.7Internal Revenue Service. Topic No. 751, Social Security and Medicare Withholding Rates

Medicare tax is 1.45% from the employee and 1.45% from you, with no wage cap. Every dollar of wages is subject to Medicare.7Internal Revenue Service. Topic No. 751, Social Security and Medicare Withholding Rates

Once an employee’s wages exceed $200,000 in a calendar year, withhold an additional 0.9% Medicare tax from their pay. The threshold applies regardless of filing status, and there is no employer match on this piece.4Internal Revenue Service. Questions and Answers for the Additional Medicare Tax

A worked example: an employee earning $5,000 in a biweekly period, well under the Social Security cap, generates these amounts on the paycheck:

  • Social Security (employee): $5,000 × 6.2% = $310
  • Social Security (employer): $5,000 × 6.2% = $310
  • Medicare (employee): $5,000 × 1.45% = $72.50
  • Medicare (employer): $5,000 × 1.45% = $72.50

Federal Income Tax Withholding

Federal income tax withholding runs off the employee’s W-4 and the IRS withholding tables in Publication 15-T, which Publication 15 (Circular E) points to.8Internal Revenue Service. Publication 15 (2026), (Circular E), Employer’s Tax Guide You pick one of two methods:

  • Wage bracket method. Look up the withholding amount in a table based on filing status, pay frequency, and wage range. This works for manual payroll with straightforward pay.
  • Percentage method. Apply a formula to the employee’s adjusted wages. Automated payroll systems use this method, and it is required when wages exceed the bracket table ranges.9Internal Revenue Service. Publication 15-T (2026), Federal Income Tax Withholding Methods

Publication 15-T carries separate table sets depending on whether the W-4 is from 2020 or later versus 2019 or earlier. Using the wrong set throws off withholding all year. If you inherit employees with older W-4s on file, keep using the pre-2020 tables for them unless they voluntarily submit an updated form.

Federal Unemployment Tax (FUTA)

FUTA is entirely on the employer. You never deduct it from a paycheck. The base rate is 6.0% on the first $7,000 of wages paid to each employee during the calendar year.5Internal Revenue Service. Topic No. 759, Form 940 – Filing and Deposit Requirements

You will almost never pay the full 6.0%. Pay your Texas unemployment taxes on time and you get a credit of up to 5.4%, which drops your effective FUTA rate to 0.6%. That works out to at most $42 per employee per year ($7,000 × 0.6%).5Internal Revenue Service. Topic No. 759, Form 940 – Filing and Deposit Requirements Falling behind on state unemployment costs you that credit, so a late SUTA payment often ends up far more expensive than its interest and penalties alone.

Texas State Unemployment Tax

The only state-level payroll tax in Texas is unemployment insurance, and the employer pays all of it. You cannot deduct any portion from wages. The tax applies to the first $9,000 of each employee’s annual wages; once that employee crosses $9,000 during the calendar year, you owe nothing more on their remaining pay for the year.10Texas Workforce Commission. Reporting and Determining Taxable Wages

Your rate depends on your experience rating with the TWC. New employers start at 2.7% for 2026, or the industry average rate, whichever is higher.11Texas Workforce Commission. Unemployment Insurance Tax Rates Over time your rate adjusts based on the unemployment claims filed against your account. Your current rate sits on the annual tax rate notice or in the Unemployment Tax Services portal.6Texas Workforce Commission. Your 2026 Tax Rates

Voluntary Contributions to Lower Your Rate

If your experience rate came in higher than you want, Texas law lets you make a voluntary contribution that offsets chargebacks on your account, and the TWC recomputes your rate. The deadline is 120 days into the calendar year for which the rate is effective.12State of Texas. Texas Labor Code Section 204.048 – Voluntary Contributions Once the TWC uses the contribution to recompute your rate, it is not refundable, so run the numbers before you pay.

Penalties for Late Texas Unemployment Tax

Late contributions accrue interest at 1.5% per month, capped at 37.5% of the amount owed.13Texas Comptroller Manual of Accounts. Revenue Object 3732 – Unemployment Compensation Penalties Fraudulently trying to reduce benefits or avoid contributions is a Class A misdemeanor. Deducting unemployment tax from employee wages carries fines between $100 and $1,000.

Deposit Schedules and Filing Deadlines

How often you deposit federal payroll taxes depends on your lookback period liability. For 2026, the IRS looks at total taxes reported from July 1, 2024, through June 30, 2025.8Internal Revenue Service. Publication 15 (2026), (Circular E), Employer’s Tax Guide

  • Monthly depositor. If you reported $50,000 or less during the lookback period, deposit by the 15th of the following month.
  • Semiweekly depositor. If you reported more than $50,000, deposits are due Wednesday or Friday depending on your payday.
  • Next-day deposit. Any time you accumulate $100,000 or more in a single day, deposit by the next business day. Hitting this threshold also bumps you to semiweekly status for the rest of the year and the following year.

New employers default to monthly in their first year. All federal deposits go through the Electronic Federal Tax Payment System (EFTPS), online or by phone.14Internal Revenue Service. EFTPS: The Electronic Federal Tax Payment System Payments must be scheduled by 8 p.m. ET the day before the due date to count as timely.

Quarterly and Annual Filing

Most employers file Form 941 each quarter to report wages, tips, federal income tax withheld, and Social Security and Medicare tax. FUTA goes on Form 940, filed annually.15Internal Revenue Service. Forms 940, 941, 944 and 1040 (Sch H) Employment Taxes

Very small employers whose total annual liability for Social Security, Medicare, and withheld income tax is $1,000 or less may qualify to file Form 944 once a year instead of quarterly.16Internal Revenue Service. About Form 944, Employer’s Annual Federal Tax Return You have to request permission from the IRS to use Form 944; you cannot just start filing it.

For Texas unemployment tax, quarterly wage reports and payments go through the TWC’s online system. You can file through Unemployment Tax Services if you have 1,000 or fewer employees, or use QuickFile for larger workforces or batch submissions.17Texas Workforce Commission. Employer’s Quarterly Wage Report Filing Options Even in quarters where you owe nothing because all employees passed the $9,000 base, you still file the report.10Texas Workforce Commission. Reporting and Determining Taxable Wages

Federal Deposit Penalties

Federal deposit penalties are keyed to how many calendar days the deposit is late:18Internal Revenue Service. Failure to Deposit Penalty

  • 1 to 5 days late: 2% of the unpaid deposit
  • 6 to 15 days late: 5%
  • More than 15 days late: 10%
  • More than 10 days after the first IRS notice, or upon demand for immediate payment: 15%

The tiers do not stack. Twenty days late is a 10% penalty, not 2% plus 5% plus 10%. The jump to 15% happens once the IRS sends a formal notice and you still do not pay within 10 days.

Trust Fund Recovery Penalty

Social Security, Medicare, and federal income tax withheld from employee paychecks are trust fund taxes: you hold them for the government. If a responsible person willfully fails to turn over those withheld amounts, the IRS can assess a penalty equal to 100% of the unpaid trust fund taxes against that individual personally.19Internal Revenue Service. Trust Fund Recovery Penalty

A responsible person can be a corporate officer, partner, sole proprietor, or an employee with authority over finances. Willfulness does not require intent to defraud. Choosing to pay rent or suppliers instead of depositing payroll taxes counts. The penalty survives bankruptcy in many cases.

Confirm the Worker Is an Employee First

None of this math applies to independent contractors, so classification comes before calculation. Misclassifying employees as contractors creates liability for the unpaid taxes plus penalties and interest if the IRS or TWC later reclassifies them.

The IRS weighs three categories of evidence: behavioral control (do you direct how the work is done), financial control (do you control how the worker is paid, whether expenses are reimbursed, and who provides tools), and the nature of the relationship (benefits, written contracts, expectation of ongoing work). No single factor decides it.20Internal Revenue Service. Independent Contractor (Self-Employed) or Employee?

The Texas Workforce Commission uses a similar 20-factor common law test for unemployment tax purposes. Under the Texas Unemployment Compensation Act, the right to direct and control a worker is enough to establish an employment relationship, even if you never actually exercise that control.21Texas Workforce Commission. Classifying Employees and Independent Contractors A TWC reclassification means back unemployment taxes on all wages paid to those workers.