Running payroll in Texas means juggling two separate compliance stacks at once: federal obligations governed by the IRS and the US Department of Labor, and a state layer handled by the Texas Workforce Commission (TWC).
Texas doesn't tax employee income, which eliminates one common withholding requirement, but that's replaced by its own unemployment insurance system, pay-frequency and final-pay rules under the Texas Payday Law, and a workers' compensation regime that's genuinely unusual among US states. Foreign employers who assume Texas is "simpler" because of the missing income tax often overlook the obligations that do apply.
What this guide covers:
- Texas payroll setup: accounts, agencies, and registration steps
- Employer and employee tax rates, caps, and wage bases (2026)
- How federal income tax withholding works with no state equivalent
- The full payroll filing cycle: deposits, quarterly returns, and year-end
- Texas pay stub requirements and record retention rules
- Penalties for late deposits, late filings, and misclassification
Texas Payroll at a Glance
Before you commit to hiring headcount, understand what these rates mean in total cost terms. Review the total cost of hiring in Texas alongside the rate tables below for a complete picture that combines employer taxes, benefits, and total hiring overhead.
How to Set Up Payroll in Texas
Every step below requires an actual account number, form, or portal, not just a policy decision. Work through them in order; several are prerequisites for what comes next.
- Establish your legal basis for employing in Texas. A foreign company must either register a US entity (corporation or LLC) and foreign-qualify it in Texas with the Secretary of State, or engage an employer of record in Texas to serve as the legal employer. The EOR path eliminates Steps 3 through 8 for the foreign parent, the EOR holds all state accounts. If you're going ahead with your own entity, continue below.
- Obtain or confirm a federal Employer Identification Number (EIN) from the IRS via IRS Form SS-4. You need the EIN before opening any federal payroll tax account. Foreign entities without a US principal place of business apply by fax or phone (not online).
- No Texas income tax withholding registration is required. Texas doesn't levy state income tax, so there's no state withholding account to open and no state withholding returns to file. Federal withholding deposits and returns are your only income-tax withholding duty.
- Register for a Texas Workforce Commission (TWC) unemployment insurance account. Sign up at twc.texas.gov within 10 days of first paying qualifying wages in a calendar quarter. For 2026, the entry-level rate is 2.70% for all groups with no exceptions. The maximum taxable wages per employee per calendar year is $9,000. TWC will assign your Employer Account Number at registration.
- Determine your workers' compensation position. Texas is one of the only US states where workers' compensation insurance is optional for most private employers. Non-subscribers give up statutory liability limits and can be sued directly by injured workers. Most foreign employers opt to obtain coverage through a licensed Texas carrier regulated by TDI-DWC; rates are set by class code and loss experience.
- Set the pay schedule and document it. Non-exempt employees must be paid at least twice per month (typically via semi-monthly pay schedules). Exempt employees can be paid monthly or more frequently. Under the Texas Payday Law, announced paydays are binding, missing a posted payday triggers a TWC wage claim.
- Confirm local payroll taxes. There are no local taxes on top of federal income taxes that apply to employees in Texas. No city or county payroll taxes require separate registration.
- Set up new-hire reporting. Federal and state laws require employers to report new hires and rehires to the Texas Office of the Attorney General; you must file within 20 calendar days of the hire date. File online at employer.oag.texas.gov.
- Establish a compliant payment rail. You need a US bank account or a payroll provider with ACH capability to pay employees in USD and remit tax deposits via the IRS's Electronic Federal Tax Payment System (EFTPS) and TWC's electronic payment portal. Foreign companies without a US bank account typically use a third-party payroll bureau or EOR.
Employer and Employee Payroll Taxes in Texas
Texas has no state income tax and no state-mandated paid family leave program, which keeps the employer tax stack shorter than most US states. That doesn't mean it's simple: two federal schemes, one state scheme, and the workers' compensation question all run in parallel.
Employer Taxes and Contributions
The Social Security wage base jumped from $176,100 to $184,500 - about a 4.8% increase for 2026 - putting the maximum Social Security withholding an employee can pay at $11,439 for the year. Employers match that dollar-for-dollar. FUTA applies a 6% tax on the first $7,000 of wages per employee each year.
Employers can typically claim a credit of up to 5.4% for contributions to SUI programs, reducing the net FUTA tax rate to 0.6%. Texas is not a FUTA credit-reduction state, so the full 5.4% credit applies. The minimum UI tax rate for 2026 is 0.32 percent; the maximum is 6.32 percent.
The combined employer cost range is wide because three variables move independently: the SUI experience rating, the workers' comp class code, and whether any employee reaches the Social Security wage-base cap early in the year. A software company with a clean claims history and mostly desk workers will sit near the bottom of that range; a logistics operation with warehouse staff and a claims history will sit at the top.
Employee-Side Taxes and Withholdings
An additional 0.9% Medicare tax applies to employee wages above $200,000 (single) or $250,000 (married filing jointly); employers withhold it but don't match it. The employer calculates and withholds every item in the table from gross pay each period; the employee never remits directly to any agency.
What Makes Rates Vary in Texas
The biggest variable is the TWC unemployment insurance rate. An employer becomes eligible for an experience-based rate after approximately three complete fiscal years of chargeable experience (October 1 through September 30). Until then, all new employers pay the entry-level 2.70% rate.
Once experienced, TWC recalculates annually using a benefit-ratio formula: the more UI claims former employees successfully charge to your account, the higher your rate, up to the maximum of 6.32% for 2026. Workers' compensation premiums add another layer: a clerical worker (NCCI class 8810) costs far less than a construction laborer (class 5606).
Before finalizing headcount budgets, foreign employers should model the realistic combined rate for their actual workforce mix, accounting for global payroll cost benchmarks when evaluating Texas against other jurisdictions.
Income Tax Withholding in Texas
How the Withholding System Works
Form W-4 is the federal withholding certificate each employee completes at hire and whenever their tax situation changes. The employer uses the IRS Publication 15-T withholding tables, or the equivalent in a payroll system, to translate each employee's W-4 elections into a per-period federal withholding amount. Texas requires no state withholding certificate because there's no state income tax.
If an employee doesn't provide a W-4, the IRS requires the employer to withhold at the single filer standard rate with no adjustments, the most common result is overwithholding, which the employee resolves at annual tax filing.
Federal tax deposit frequency is determined by the IRS's look-back rule: an employer's total reported federal tax liability in the look-back period (the 12-month period ending June 30 of the prior year) determines whether they deposit monthly (liability below $50,000) or semi-weekly (liability $50,000 or more).
Monthly depositors remit by the 15th of the month following each payroll month; semi-weekly depositors remit within two or three banking days of each payday. All deposits go through EFTPS. Texas has no equivalent deposit schedule because there's no state withholding.
Payroll records must be retained for at least four years under IRS standards, covering W-4 forms, payroll journals, tax deposit receipts, and copies of filed returns. TWC also requires employers to maintain payroll records for four years for UI audit purposes.
Income Tax Brackets: Texas
Texas imposes no state income tax on individuals or wages. There are no Texas state income tax brackets, no state withholding tables, and no state annual reconciliation return for income tax. The Texas Comptroller of Public Accounts confirms this at comptroller.texas.gov. Employees receive W-2 forms reflecting federal withholding only; the Texas pay stub carries no state income tax line.
Federal income tax brackets still apply to your Texas employees in full, at the same graduated rates that apply everywhere else in the US. The top federal marginal rate is set by the IRS and changes through federal legislation, consult IRS Revenue Procedure tables for the current year's bracket thresholds.
The Payroll Filing Cycle in Texas
Foreign employers often separate "running payroll" from "filing payroll", a distinction that creates missed deadlines. Both are legal obligations, and in Texas they run on different schedules.
The Recurring Payroll Cycle
Per pay period:
- Calculate gross pay. Include base wages, overtime at the FLSA 1.5x rate for non-exempt hours above 40 in a workweek, commissions, and bonuses. Expense reimbursements at or below the IRS standard mileage rate (reimbursements under an accountable plan) are not wages and don't get included in the tax base.
- Calculate employer-side taxes for each scheme: Social Security 6.2% on wages up to $184,500 (2026); Medicare 1.45% on all wages; Texas UI at your assigned rate on the first $9,000 annual per-employee wage base.
- Withhold employee-side taxes: Social Security 6.2%, Medicare 1.45%, Additional Medicare 0.9% on wages above $200,000, and federal income tax per the employee's W-4 elections.
- Reach net pay by subtracting all employee withholdings from gross. No state income tax applies.
- Issue a compliant pay statement every pay period, meeting the Texas Payday Law requirements detailed in the Pay Stub section below.
- Pay the employee in USD on or before the announced payday. A pay date missed by even one day violates the Texas Payday Law; employees may file a TWC wage claim immediately.
- Deposit federal taxes via EFTPS on your monthly or semi-weekly schedule. Include both employer and employee FICA shares, plus all federal income tax withheld. Remit Texas UI taxes through TWC's electronic portal.
Quarterly:
- File Form 941 (Employer's Quarterly Federal Tax Return) with the IRS. The return is due the last day of the month following the quarter, April 30, July 31, October 31, January 31. File the Texas UI quarterly wage report, Form C-3, with TWC by the same dates: quarterly payroll taxes in Texas are due on April 30, July 31, October 31, and January 31. TWC requires both electronic filing and electronic payment.
Annually:
- File Form 940 (FUTA) with the IRS by January 31. Deliver W-2 forms to employees and file with the Social Security Administration by January 31. Texas has no separate state income tax reconciliation return. If you're an Applicable Large Employer (50 or more full-time equivalent employees), file ACA Form 1095-C with the IRS and furnish to employees by IRS-published deadlines.
Late Filing and Payment Penalties
Missing a deadline in Texas payroll exposes you to two fronts simultaneously: federal penalties from the IRS and state penalties from TWC.
Federal failure-to-deposit (FTD) penalties are tiered under IRC Section 6656:
- 1 to 5 days late: 2% of the unpaid deposit amount
- 6 to 15 days late: 5% of the unpaid deposit amount
- 16 or more days late, or 10+ days after IRS notice: 10%
- Not paid within 10 days of IRS demand: 15%
If Form 941 itself is filed late, the failure-to-file charge accrues at 5% per month of the unpaid tax shown on the return, capped at 25%. These charges stack: a missed deposit that also sits on a late return incurs both the FTD tier and the failure-to-file rate on the same liability.
The bigger risk is the Trust Fund Recovery Penalty, which can make owners, officers, and anyone with authority over payroll personally liable for the withheld portion of the tax, even after the business closes. The withheld amounts - federal income tax and the employee FICA shares - are treated as trust-fund money held for the government; misusing them, even temporarily, exposes responsible individuals to the full amount personally.
TWC penalties for late or missing UI returns and payments include interest charges on overdue amounts and penalty assessments; if a TWC audit determines that workers classified as 1099 contractors should have been W-2 employees, TWC will assess back SUI taxes on all wages paid to those workers, plus penalties and interest. The international worker classification question deserves careful attention before any Texas worker is put on a 1099 basis.
New-hire reporting penalties: Texas Administrative Code provides a $25 charge each time an employer fails to report hiring an employee, and $500 for conspiring with an employee to fail to file a report or submit a false or incomplete report.
Foreign employers without a US entity can sidestep most of this exposure through the hiring options without an entity in Texas described separately, the EOR or PEO model transfers the compliance obligations to the registered employer of record. For context on how EOR and direct employment compare structurally, the EOR vs. traditional employment comparison covers the full tradeoff.
Pay Stub Requirements in Texas
Texas sits in a relatively small category: states that legally require written pay statements. Yes, every pay period, with no exceptions, under the Texas Payday Law. Those stubs must show pay rate, hours worked, gross pay, itemized deductions, and net pay, even if you're paying in cash. Electronic stubs are allowed only if the employee can print them.
Every compliant Texas pay statement must include:
- Employer identity: name and address
- Pay period dates: the start and end date of the period being paid
- Gross pay: total earnings before any deductions
- Hours worked and hourly rate (required for non-exempt employees; salaried exempt stubs show the fixed amount)
- Itemized deductions: each deduction labeled by type, federal income tax withheld, Social Security 6.2%, Medicare 1.45%, any Additional Medicare, court-ordered garnishments, voluntary deductions
- Net pay: the amount actually paid
Texas paychecks carry no state income tax line, there isn't one, because Texas has no state income tax. Employees who don't receive compliant pay statements can file a free complaint with the TWC online.
Unlike California (where non-compliant stubs trigger statutory damages up to $4,000 per violation), Texas doesn't prescribe a per-stub charge amount in statute, but TWC can investigate and issue penalty orders under the Texas Payday Law, and wage-claim litigation remains a risk.
For record retention, federal rules require payroll records to be kept for four years; TWC applies the same standard for UI audit purposes. Electronic records are acceptable provided they're accessible and printable. A foreign employer using a payroll provider should confirm that the provider's system generates and archives pay statements meeting Texas's specific content requirements, a generic international pay stub template commonly omits the itemized-deduction detail Texas law requires.
Managing this through a purpose-built remote employee compliance process reduces that risk considerably.
Additional Payroll Obligations in Texas
Expense Reimbursements and Allowances
Texas doesn't have a state statute that expressly mandates reimbursement of all necessary business expenses (unlike California Labor Code Section 2802). Reimbursement obligations in Texas are primarily governed by the FLSA: expense deductions that push a non-exempt employee's net pay below minimum wage in any workweek are prohibited under federal law. Most Texas employers reimburse reasonable, documented business expenses to avoid FLSA exposure and retain talent.
Mileage reimbursements paid at or below the IRS standard business mileage rate under an accountable plan are tax-free to the employee and excluded from payroll taxes. Reimbursements above the IRS rate, or under a non-accountable plan, are treated as wages and subject to withholding. Remote-work expense obligations - home office stipends, internet, equipment - follow the same logic: accountable-plan reimbursements are tax-free; flat monthly allowances without substantiation are wages.
Understanding how global employee benefits interact with local tax rules helps foreign employers design compliant allowance structures across markets.
Year-End Payroll Obligations
The Texas year-end payroll checklist looks like this:
- W-2 forms: Deliver to all employees and file with the Social Security Administration by January 31. Employers filing 10 or more information returns must file electronically.
- Form 940: File the annual FUTA return with the IRS by January 31. If FUTA deposits were made in full and on time, the IRS grants a 10-day extension to February 10.
- Texas UI annual reconciliation: TWC doesn't require a separate annual reconciliation form distinct from the four quarterly C-3 filings. The fourth-quarter C-3, due January 31, closes the annual cycle.
- ACA Form 1095-C: Applicable Large Employers (50 or more full-time equivalents) must furnish to employees and file with the IRS by the IRS's published annual deadlines.
- Corrected filings: W-2c and Form 941-X are the respective correction forms if errors turn up after original submission.
Local and Industry Variations
Texas state law preempts cities and counties from setting their own minimum wages above the state (federal) floor, no Austin, Houston, Dallas, or San Antonio minimum wage ordinance applies. There are no local payroll taxes on top of federal income taxes that apply to employees in Texas. There's no city or county payroll tax registration requirement of any kind.
Industry-specific note: Texas construction employers and those in certain government-contract work may encounter prevailing-wage requirements under the Texas Prevailing Wage Law (Texas Government Code, Chapter 2258) on public works contracts. These set minimum pay rates by trade classification for covered projects, they don't change the payroll tax structure but do affect the wage base on which taxes are calculated.
Always confirm whether a specific contract triggers prevailing-wage coverage before processing the first payroll against it. For companies simultaneously hiring across borders, managing global payroll compliance requires this same project-level specificity in every jurisdiction.
How Borderless AI Runs Payroll in Texas
Borderless AI operates through its own registered US entity, not as an aggregator passing work to a third-party shell.
For companies with their own Texas entity that need payroll processing only, Borderless AI's Global Payroll platform runs the full gross-to-net calculation, applies every rate and cap at its 2026 verified value, deposits federal taxes via EFTPS on the correct monthly or semi-weekly schedule, files quarterly Form 941 and the Texas UI Form C-3 by their statutory deadlines, and generates compliant Texas pay statements for every employee every period.
For companies without a US entity, the Employer of Record service is the complete package: Borderless AI is the employer on record, holds all state accounts, and absorbs the full compliance responsibility. State law changes - minimum wage updates, any new Texas leave mandates - are applied automatically without requiring client intervention.
Book a demo to see how Borderless AI handles Texas payroll end-to-end, from the first tax calculation to the last filing.
> Legal Disclaimer: This guide is for general informational purposes only and does not constitute legal, tax, or payroll advice. Payroll regulations in Texas change frequently, rates, thresholds, and filing requirements are updated at least annually. Verify all figures with the relevant authorities or a qualified payroll professional before processing payroll.
Learn More: Texas Hiring Guides
This guide is part of our complete Texas hiring series. Explore the other topics:
