Payroll Taxes for Houston Small Business: TWC Rates, FUTA Credit, and Texas-Specific Rules

A staffing agency owner in Sugar Land asked us a question we hear regularly: “I thought Texas had no income tax, so why is my payroll tax bill so high?”

She was right that Texas has no state income tax withholding. But her business had 14 employees, and her combined federal and Texas unemployment tax obligations alone were over $4,000 per year, before the FICA employer match on top of that.

Texas doesn’t tax income, but Texas employers still carry a real payroll tax load. The difference from other states is in the structure, not the burden.

Here’s how payroll taxes work specifically for Houston small businesses.

What’s the Same as Every Other State

Two taxes apply to every employer in the United States regardless of state:

FICA employer match. For every employee, you pay 6.2% of wages up to the $176,100 Social Security wage base (2026 figure) and 1.45% of all wages for Medicare. This isn’t withheld from the employee. It’s your expense on top of their gross pay.

On a $50,000 salary, your annual FICA match is $3,825. On a 10-person team averaging $45,000 each, your FICA match costs the business roughly $34,400 per year.

Federal Unemployment Tax (FUTA). You pay 6.0% on the first $7,000 of each employee’s annual wages. The good news: if you pay state unemployment taxes on time, you receive a credit of up to 5.4%, making the effective FUTA rate 0.6%.

On 10 employees, annual FUTA at 0.6% is about $420. Small number, but it’s due quarterly and missing it creates a separate penalty.

What’s Different in Texas

No state income tax withholding. Texas has no state income tax, so you don’t withhold state income tax from employee paychecks. This is the big one Houston employers hear about. It simplifies your employee-side calculations significantly compared to employers in California or New York.

But “no state income tax” only removes one line from payroll. The rest of the Texas-specific obligations still apply.

Texas Unemployment Insurance (UI) through the TWC. Instead of state income tax, Texas employers fund the Texas Workforce Commission’s unemployment program by paying Texas UI. This is the tax that surprises many first-time employers.

Texas TWC Rates: How They Work

TWC UI rates are experience-rated, meaning your rate depends on your own layoff history.

New employer rate: 2.7% of the first $9,000 in wages per employee. This applies for your first three years in business, before the TWC calculates your experience rate.

After three years, the TWC looks at the ratio of unemployment benefits paid to your former employees versus the total wages you’ve paid. If your former employees collected a lot of unemployment, your rate goes up. If none of your former employees claimed benefits, your rate can drop to the minimum.

The minimum rate for experienced employers in 2026 is 0.23%. The maximum is 6.23%. Most small businesses without significant layoff history land between 1.5% and 3.5%.

On a 10-person team each earning at least $9,000 per year (which means the first $9,000 is taxable), TWC UI at 2.7% costs $2,430 per year. At 6.23%, it costs $5,607.

You can check your current rate by logging into your TWC employer account.

The FUTA Credit and Why You Can’t Ignore TWC Deadlines

Here’s the Texas-specific penalty trigger that hurts Houston employers who let TWC obligations slide.

The 5.4% FUTA credit (the one that brings your effective FUTA rate from 6.0% down to 0.6%) is contingent on being current with state unemployment taxes. If Texas loses its “certified state” status with the Department of Labor (which happens when states have borrowed federal unemployment funds and haven’t repaid them), the FUTA credit gets reduced.

More immediately: if you personally fail to pay your TWC taxes on time, you can lose part of that credit on your own return. The IRS will deny the full credit and you’ll pay a higher FUTA rate on your return.

The math matters here. Your annual FUTA obligation on 10 employees is normally about $420. If you lose the credit, it jumps to $4,200. That’s a $3,780 difference because you missed your TWC payments.

TWC Filing Deadlines and Late Penalties

TWC quarterly reports are due by the last day of the month following the quarter:

• Q1 (January through March): April 30
• Q2 (April through June): July 31
• Q3 (July through September): October 31
• Q4 (October through December): January 31

The TWC penalty for filing late is $25 per day, starting the day after the deadline. A report filed 30 days late costs $750. A report filed 60 days late costs $1,500. These accumulate independently of any federal penalties.

Payment of TWC taxes is due on the same schedule. Late payment creates interest charges at 1.5% per month on the unpaid balance, plus the daily late-filing fee if the report itself was also late.

New Hire Reporting: Texas-Specific Requirement

Texas employers must report new hires to the Texas Attorney General’s Office within 20 days of their start date. This applies to every new employee and to any re-hired employee who was off payroll for at least 60 consecutive days.

The report requires the employee’s name, Social Security number, start date, and your employer information. It can be submitted online at OAG Texas Employer New Hire Reporting.

Texas has a $25 fine per unreported hire and a $500 fine per hire that was reported with intent to circumvent the requirement.

The new hire reporting system is how the state identifies parents who owe child support and have taken a new job. Non-compliance puts you in the middle of a state enforcement action for something that has nothing to do with your actual business.

The IRS Penalty Structure for Payroll Tax Deposits

Federal payroll tax deposits go through EFTPS. The IRS penalty schedule for late deposits:

• 1 to 5 days late: 2% of the deposit amount
• 6 to 15 days late: 5%
• More than 15 days late: 10%
• 10+ days after first IRS notice: 15%

These apply per deposit period. A monthly depositor can face 12 separate penalty events in one year, one for each month’s deposit. Missing January, February, and March deposits doesn’t produce a single penalty. It produces three.

The trust fund recovery penalty sits above all of this. When payroll taxes go unpaid long enough, the IRS can assess the full unpaid amount personally against any “responsible person” (typically anyone who signed checks, managed payroll, or had authority over business finances). This penalty survives bankruptcy and attaches to personal assets.

Worker Classification: The Tax Trap With No Easy Escape

Texas employers, particularly in construction, logistics, and professional services, frequently pay workers as independent contractors who the IRS considers employees.

If the IRS reclassifies your contractors as employees, you owe:

• Back payroll taxes for every period they worked
• Your employer FICA match for those periods
• Federal income tax withholding (you can sometimes recover this from the employee, often you can’t)
• Penalties and interest on all of the above

The IRS Form SS-8 is used to request a worker classification determination. Most tax professionals recommend getting this right before someone files rather than after. We cover the contractor versus employee question in depth in our guide to Houston payroll services.

What This Looks Like in Practice for a 10-Person Houston Business

A Houston landscaping company with 10 employees paying an average of $40,000 in annual wages:

• FICA employer match: $30,600
• FUTA (effective 0.6% on first $7,000 each): $420
• TWC UI (new employer rate 2.7% on first $9,000 each): $2,430

Total annual payroll tax obligation as employer: $33,450

That’s $33,450 the business owes on top of the wages themselves, before any employee withholdings. Budgeting for this number is the difference between a business that makes payroll and a business that runs out of cash at quarter-end.

For the complete picture of running payroll in Texas, including the pay-period process, EFTPS deposits, and quarterly filings, see our full payroll process guide for Houston small businesses.

Questions about your specific TWC rate or whether your contractor setup creates reclassification risk? Call us at (346) 389-5215 or request a free payroll consultation. These are the kinds of questions that save Houston businesses from expensive surprises.