How Payroll Works for Small Businesses in Texas (A Complete Guide)

Disclaimer: The information on this website (including all examples, explanations, and content) is for general informational purposes only and should not be considered tax, legal, or financial advice. Always consult with a qualified professional about your specific situation.

You Hired Your First Employee. Now What?

"I finally hired some help. How do I actually pay them without messing up my taxes?"

That's one of the most common questions I hear from business owners around Hunt County and Rockwall once they grow past doing everything themselves. Hiring your first employee feels like a huge win, right up until you realize payroll is a lot more than writing a check.

You've got tax withholding, employer taxes, deposits, forms, and deadlines. Miss a step and you can end up with penalties that cost far more than the help you hired.

Here's the good news. Payroll in Texas follows a clear set of rules. Once you understand what's required, it becomes a routine instead of a worry. This guide walks through how payroll actually works for a small business in Texas, what taxes you owe, and how to set things up right from the start.

Does Texas Make Payroll Easier?

A little, yes. Texas has no state income tax, which means you do not withhold state income tax from your employees' paychecks the way employers do in many other states. That removes one whole layer of paperwork.

But here's where business owners get tripped up. No state income tax does not mean no payroll taxes. You still have federal payroll taxes, and you still have a Texas state payroll tax called unemployment tax.

So if you've been telling yourself payroll will be simple because "Texas doesn't have income tax," slow down. The federal side is the bigger piece, and Texas adds its own unemployment tax on top.

Let's break down every tax you actually have to handle.

The Payroll Taxes Every Texas Employer Has to Handle

There are four main payroll taxes for a typical Texas small business. Three are federal, and one is state.

Federal Income Tax Withholding

You withhold federal income tax from each employee's paycheck based on the information they give you on their Form W-4 and the IRS withholding tables. This is the employee's money. You are just holding it and sending it to the IRS on their behalf.

The amount depends on how much they earn, their filing status, and what they put on their W-4. The IRS publishes the methods and tables in Publication 15-T, and the IRS overview of employment taxes explains the basics.

Social Security and Medicare (FICA)

These two taxes are often lumped together as FICA. Both you and your employee pay them.

You withhold the employee's share from their paycheck, and then you pay a matching employer share out of your own pocket. There is also an Additional Medicare Tax that applies once an employee's wages pass a certain threshold in a year, and that piece is withheld from the employee only.

Because the wage bases and thresholds for Social Security can change from year to year, I'm not going to print a number here that goes stale. Check the current figures on the IRS employment taxes page or in Publication 15 before you run payroll.

Federal Unemployment Tax (FUTA)

FUTA is an employer-only tax. Your employees do not pay it, and you do not withhold it from their checks. You pay it out of your own funds and report it once a year on Form 940.

FUTA applies to a limited amount of each employee's wages for the year, and employers who pay their state unemployment tax on time generally qualify for a credit that lowers the effective FUTA rate. The IRS lays this out in Topic No. 759 on Form 940 and FUTA.

Texas Unemployment Tax (SUTA) Through the TWC

This is the state payroll tax people forget about. Texas charges employers a state unemployment tax, administered by the Texas Workforce Commission (TWC). Like FUTA, it is paid by the employer, not withheld from employees.

Your specific rate depends on your business and its history, and new employers start at an assigned rate. You report wages and pay this tax quarterly. The TWC explains the basics on its Unemployment Tax Basics page.

So What About State Income Tax?

There isn't one. Texas does not have a personal state income tax, so there is no state income tax withholding on Texas payroll. That's the one genuine break Texas gives you, and it's a real one.

Before You Run Your First Payroll: Setup Steps

You can't just start paying people and sort the taxes out later. A few things need to be in place first. Here's the order I walk new employers through.

1. Get a Federal Employer Identification Number (EIN)

An EIN is your business's federal tax ID for payroll. You use it on your payroll tax filings. You can apply for one directly through the IRS, and there's no cost.

2. Register With the Texas Workforce Commission

Once you pay wages and become liable for Texas unemployment tax, you need to register with the TWC. The TWC asks employers to register promptly after becoming liable, and you can do it online through Unemployment Tax Registration. The New Texas Employer Information page is a good starting point.

3. Report Every New Hire

Federal and state law require you to report new and rehired employees. In Texas, you report new hires to the state's new hire reporting program within the required window after their hire date. The TWC covers the rules on its New Hire Reporting page.

4. Collect the Right Forms From Each Employee

Before someone's first paycheck, you need:

  • Form W-4 so you know how much federal income tax to withhold
  • Form I-9 to verify they are legally allowed to work in the United States

Keep these on file. They are part of your required employment records.

5. Sort Out Workers' Compensation and Insurance

Texas handles workers' compensation differently than most states, and the rules around coverage and notice can affect you as an employer. This is worth a conversation with a qualified advisor or your insurance agent so you know where you stand before you bring people on.

How a Single Payroll Run Actually Works

Once you're set up, each pay period follows the same rhythm. Here's what one payroll run looks like from start to finish.

  1. Track hours and wages. For hourly employees, total their hours, including any overtime. For salaried employees, confirm the pay for the period.
  2. Calculate gross pay. This is the total earned before any taxes or deductions come out.
  3. Withhold taxes and deductions. Subtract federal income tax, the employee's share of Social Security and Medicare, and anything else like retirement contributions or health premiums.
  4. Calculate your employer taxes. Figure your matching FICA share, plus FUTA and Texas unemployment tax. These do not come out of the employee's check. They are your cost as the employer.
  5. Pay your employee. The leftover after withholding is their net pay, or take-home.
  6. Set aside the tax money. This is the step that wrecks people. The taxes you withheld plus the taxes you owe need to be deposited with the government, not spent on other bills.

That last point matters so much I want to be blunt about it. The income tax and FICA you withhold from employees is not your money. You're holding it in trust until you deposit it. Spending it is how good businesses end up in serious trouble, which I cover more in our post on common payroll mistakes.

Depositing and Reporting Payroll Taxes

Running payroll is only half the job. The other half is sending the taxes to the government on the right schedule and filing the right forms.

Depositing Federal Payroll Taxes

The federal income tax you withheld, plus both shares of Social Security and Medicare, has to be deposited with the IRS. These deposits are made electronically, and your deposit schedule (how often you have to deposit) depends on your total tax amount. The IRS explains this on its Depositing and Reporting Employment Taxes page.

The Main Federal Payroll Forms

  • Form 941 is the quarterly return where you report wages, withheld income tax, and Social Security and Medicare taxes.
  • Form 940 is the annual return for your FUTA (federal unemployment) tax.
  • Form W-2 reports each employee's annual wages and withholding. You give a copy to the employee and file with the Social Security Administration.
  • Form W-3 is the summary you file along with your W-2s.

Reporting and Paying Texas Unemployment Tax

For Texas unemployment tax, you file a quarterly wage report and pay the tax to the TWC. You can manage this through the TWC's online tax services.

Employees vs. Contractors

If you pay an independent contractor rather than an employee, you do not withhold payroll taxes, and at year end you may issue a Form 1099-NEC instead of a W-2. But be careful here, because calling someone a contractor when they are really an employee is one of the most expensive mistakes a business can make. I cover exactly how to tell the difference in our guide on 1099 vs. W-2 worker classification.

Payroll Tax Deadlines to Keep on Your Calendar

Missing a payroll deadline is one of the easiest ways to rack up penalties, and they add up fast. Keep these on your radar:

  • Federal tax deposits on your assigned schedule (the IRS tells you whether you're a monthly or semiweekly depositor)
  • Form 941 filed quarterly
  • Texas unemployment wage reports filed quarterly with the TWC
  • Form 940 filed annually for FUTA
  • W-2s to employees and 1099-NECs to contractors by the start of the year, with the standard deadline being January 31

For the exact dates each year, the IRS keeps an Employment Tax Due Dates page that is worth bookmarking.

Common Payroll Questions From North Texas Business Owners

Do I have to withhold state income tax in Texas?

No. Texas has no personal state income tax, so there is no state income tax withholding. You still handle federal withholding and Texas unemployment tax.

Do I owe payroll taxes if it's just me, the owner?

It depends on your business structure and how you pay yourself. A sole proprietor taking owner draws is different from an employee on payroll. This is exactly the kind of thing worth reviewing with a professional, because the right answer affects both your payroll and your income taxes.

How often do I have to pay payroll taxes?

Federal deposits follow a schedule the IRS assigns based on your tax amounts, usually monthly or semiweekly. Texas unemployment tax and your Form 941 are handled quarterly. Form 940 is annual.

Can I just pay everyone as a 1099 contractor to skip all this?

Please don't do this just to avoid payroll. Whether someone is an employee or a contractor is determined by the facts of the working relationship, not by what's convenient. Misclassifying workers can lead to back taxes and penalties. See our 1099 vs. W-2 guide for how the rules actually work.

Is it worth hiring someone to handle payroll?

For a lot of small businesses, yes. Payroll is repetitive, deadline driven, and unforgiving of mistakes. We break down the trade-offs in DIY payroll vs. hiring a payroll service.

Getting Payroll Right From the Start

Payroll in Texas is very manageable once you understand the pieces. You withhold federal income tax and FICA from your employees, you pay the employer share of FICA along with FUTA and Texas unemployment tax, you deposit everything on time, and you file the right forms. No state income tax to worry about, but plenty of federal and state deadlines that deserve your attention.

The businesses that get into trouble are almost always the ones that treated withheld taxes like spending money or fell behind on deposits. Set up a clean system from day one and payroll becomes a non event.

If you keep good books to begin with, payroll fits right in. If your books need work first, start with our guide to small business bookkeeping, and if you pay quarterly taxes as an owner, our post on quarterly estimated taxes pairs well with this one.

If you're a business owner in Quinlan, Hunt County, Rockwall, Kaufman, or the greater Dallas area and you want payroll handled correctly without the stress, we work with small businesses throughout Texas.

Ready to take payroll off your plate? Contact us here to talk about payroll setup and ongoing payroll service that keeps you compliant and on time.