The Complete Guide To Texas State Income Tax & Payroll Taxes

Texas has no state income tax, so you only have to withhold income tax at the federal. Income taxes at the federal level can be in the range of 0%-37%. Employers are required to withhold income tax based on their employee’s withholding selections on their W-4s.

Taxable entities or those doing business in Texas are subject to the Texas franchise tax if their total annualized revenue exceeds the $2,470,000 threshold in either 2024 or 2025.

The Texas franchise tax rate ranges from 0.375%-0.75% depending on whether your business falls under retail or wholesale and whether you’ve used the EZ Computation sheet to calculate your liability. Businesses with less than $20 million in gross receipts may calculate their franchise tax liability using the EZ Computation sheet.

There are numerous deductions, credits, and exemptions that make it possible for businesses to reduce their franchise tax burden.

Texas franchise tax reports are due on May 15th annually, or not the next business day if the exact day is on a legal holiday or weekend. Alongside franchise tax reports, businesses must also file an Information Report.

Small business owners and their employees are both required to pay taxes for the Federal Insurance Contributions Act (FICA), which supports Social Security taxes and Medicare taxes. Businesses and their employees in Texas pay 6.2% of all earnings that don’t exceed $147,000 for Social Security taxes; the rate for Medicare taxes is 1.45% of both an employer’s and employee’s total earnings in a year.

Rates change annually per direction from the IRS and are worth regularly monitoring even as you get more comfortable with reporting Texas payroll taxes.

The Additional Medicare tax is the second federal-level tax that employees are responsible for paying. Business owners in Texas are required to withhold the 0.9% Additional Medicare Tax from employees who meet a certain filing status as well as from wages that are greater than $200,000 annually.

Employers are required to pay UI tax on the first $9,000 of their employees’ annual wages. The exact rate that UI taxes use changes every year and is based on five components: General Tax Rate (GTR), Replenishment Tax Rate (RTR), Obligation Assessment Rate (OA), Deficit Tax Rate (DTR), and Employment Training Investment Assessment (ETIA). UI rates typically fall between 0.23% and 6.23% and are determined using the taxable wage base of your employees’ first $9,000 in wages annually.

Texas doesn’t use its comptroller’s office to collect property taxes or set property tax rates at the state level. Local units in Texas that are set up to collect property taxes can put tax revenue toward services that support schools, municipalities, and local policing and firefighting.

Texas is one of 38 states in the U.S. to not levy an estate or inheritance tax on its residents. Neither the state nor local governments in Texas partake of any proceeds from willed or inherited property.

No small business owner can start running their own payroll taxes without knowing their state’s rates for sales and use taxes. The rate in Texas is currently 6.25% at the state level, although cities, counties, districts, and other local taxing jurisdictions can impose their own additional rate of 2% for a combined total sales use tax rate of 8.25%. Businesses in Texas must collect sales and use taxes at both the state and local levels and should refer to their specific area’s information on local sales and use tax rates.

Employers must contribute 6% of the first $7,000 of their employees’ annual earnings toward the federal unemployment tax (FUTA). FUTA encourages business owners to see if they qualify for a federal tax credit to contribute toward FUTA. Federal tax credits are 5.4% and since most employers are usually eligible for them, the FUTA rate often becomes 0.6% of the first $7,000 of an employee’s yearly wages.

Business owners also need to consider court-ordered wage garnishments, child support payments, and employee contributions to accounts whenever applicable. Employers in Texas must deduct the proper amounts from their employee’s paychecks and submit them to the appropriate authorities on time.

Texas uses the federal minimum wage rate of $7.25 per hour which was adopted in 2009, and there doesn’t seem to be an indication of a minimum increase happening any time soon. Employers should use a minimum wage of $2.13 for tipped employees together with a maximum tip credit of $5.12. Employers can, at their discretion and under certain restrictions, count tips as well as the value of meals and lodging toward their minimum wage.

To educate employees on labor law topics like the minimum wage, anybody who operates a business in Texas is required to display a poster that contains information on the Worker’s Compensation Program, the Uniformed Services Employment and Reemployment Rights Act, the Fair Labor Standards Act, the Employee Polygraph Protection Act, and the Occupational Safety and Health Act. Businesses in Texas typically need to print and post the Department of Labor’s mandatory labor law posters in addition to their state posters.

Texas UI tax, sometimes called reemployment tax, provides for the adequate funding of benefit payments and the solvency of Texas’ Unemployment Compensation Trust Fund. Employers need to pay Texas UI tax on the first $9,000 that each of their employees makes in a single calendar year.

Employers also need to pay reemployment tax at the federal level through FUTA contributions. Business owners in Texas pay federal reemployment taxes with a chance for eligibility for tax breaks of up to 5.4 percent in the form of a federal tax credit.

Both federal, as well as Texas state laws, require that business owners submit their new hire information to the Employer New Hire Reporting Operations Center in the Texas Office of the Attorney General. Employers report information about their new hires to the Center within 20 calendar days after the hire date, as mandated by federal law under the Personal Responsibility and Work Opportunity Reconciliation Act of 1996.

If you’re unfamiliar with reporting any new hire information whatsoever in either Texas or any other U.S. state, remember that if you have an employee who is required to complete a W-4 form, chances are good that you need to report their new hire information. Employers who renege on their new hire reporting duties face a penalty of $25 for every occurrence in which they don’t furnish a new hire report. Penalties of up to $500 are possible for employers who are guilty of conspiring with employees to purposefully file a false or incomplete new hire report.

Employers in Texas are free to adopt policies or contracts that establish vacation time at an amount of their choosing. Basically, employers aren’t legally required to offer any company-wide PTO policies, and any vacation or PTO policy that they do establish must adhere to the Texas Labor Code. Business owners may rely on a “use it or lose it” basis to both simplify their PTO tracking in their payroll management software and cap time-off accruals to discourage rollovers that may exceed an accrual cap.

It’s not uncommon for employers, especially small business owners with just one or two employees, to offer PTO for several “unofficial” reasons, which typically include things like holiday time and jury duty as well as leave for voting and bereavement. Employers don’t need to offer PTO for reasons such as these, although it’s fairly standard practice for businesses to determine at least some circumstances under which their employees may be paid for hours not worked.

At the federal level, all Texas employees are eligible for up to twelve weeks of unpaid, job-protected leave under the Family and Medical Leave Act (FMLA).

Texas doesn’t use labor laws relating to the payment of overtime. Federal overtime laws do apply in Texas, though, and they set overtime at 1.5 the regular pay rate for an employee. The Fair Labor Standards Act (FLSA) requires that employers in Texas pay overtime to employees who work beyond their standard 40-hour workweek.

Texas does not have labor laws pertaining to meals and breaks or severance pay either, and the federal government does not require that the state provide them. Employers in Texas who do provide breaks must still pay employees if lunch breaks last fewer than 20 minutes, and employers who provide severance pay must adhere to terms established in either their company policy or in the applicable employment contract.

Child labor laws in Texas apply to any employee younger than 18 years, and they make it illegal to employ anyone who is under the age of 14 unless specific circumstances are in place. The Texas Child Labor Law grants general exemptions to hours worked for children who are working in non-hazardous casual employment; 11 years or older delivering newspapers; 16 years or older publicly selling newspapers; taking part in school-supervised work-study programs; employed through a county-supervised rehabilitation program; or employed in agriculture and outside of normal school months.

Hours of legal employment for child employees vary based on age ranges. Children aged between 16 and 17, for example, don’t need to contend with restrictions on the hours or times of day that they can work. Children who are between 14 and 15, on the other hand, can’t work for longer than 8 hours in one day and for no more than 48 hours in one week. Per the federal Fair Labor Standards Act, employees aged between 14 and 15 years may not work during school hours and only up to 18 hours in one week while school is in session.

The Texas Payday Law, previously the Texas Payment of Wages Act, details payment obligations that employers must adhere to when paying their employees throughout a calendar year. The law applies only to private employers and not public employers or independent contractors, and it defines how those public employers can release wages to their employees. Wages, as defined by the Texas Payday Law, include payments issued for PTO or sick leave as well as for severance and even parental leave pay.

Payment obligations in Texas require that employers pay any employee who is defined as an executive, administrative, or professional employee under the FLSA at least once a month. The law requires that all other types of employees be paid twice monthly and, unless an employer stipulates otherwise, that paydays fall on the first and fifteenth day of every month. Per the Texas Payday Law, employers can only use electronic transfers, checks, or cash to pay their employees on paydays unless an employee agrees to an alternative form of payment in writing.

In addition to paying employees in adherence with the Texas Payday Law, employers in Texas are also responsible for paying garnishments on behalf of their employees. Garnishments are court orders or levies from the IRS that direct employers to withhold a certain amount from an employee’s paycheck in the interest of repaying debts.

Disability insurance falls under the purview of FICA withholding for Social Security and Medicare benefits. Employers in Texas are obligated to withhold a fixed amount from their employees’ salaries during each pay cycle.

The Social Security tax component of FICA tax requirements in Texas mandates that employers and their employees contribute 6.2 percent of any earnings up to $147,000. Per FICA requirements, employers must match an employee’s amount and contribute the funds to the Social Security Trust Fund to support disability insurance in addition to Medicare benefits and retirement income.

Employers in Texas aren’t required to carry workers’ compensation insurance. Although Texas doesn’t make state-regulated workers’ comp insurance mandatory for employers to offer, it’s common for private employers to provide coverage to contend with work-related injuries or illnesses that their employees sustain. Without any coverage for workers’ compensation insurance, you risk paying for any costs related to issues such as personal injury lawsuits or missed and incomplete employee wages.

Texas workers’ comp laws stipulate that employees have up to 30 days to notify their employer that they’ve been injured or fallen ill due to work. Employees can then have up to a year to submit their formal paperwork for their workers’ compensation claim. Employers have just eight days to let their insurer know about their employee’s claim. Depending on the situation, employees may need to visit a physician to become eligible to receive workers’ comp benefits.

The Texas constitution prohibits the use of personal income tax. The state of Texas relies on sales and use taxes as well as local taxes to collect its income.

Texas-based businesses are expected to pay regular federal payroll taxes like FUTA and FICA, as well as Texas Sales & Use taxes.

Texas has a lean set of payroll tax requirements and does not have any state withholding tax. Texas has the fifth-lowest overall tax burden per capita and is business-owner-friendly when it comes to reporting payroll taxes.

The minimum wage in Texas is the same as the Federal Minimum Wage rate which is$7.25/hour.

The Texas unemployment tax has a  minimum tax rate of 0.23 percent and a maximum rate of 6.23 and must be paid on the first $9,000 that each of their employees makes each year.