Small Business Payroll in Texas: What Houston Employers Need to Know (2026)

Texas payroll looks simple on the surface. No state income tax withholding. No state disability insurance. No paid family leave mandate. Compared to California or New York, running payroll in Texas feels like a gift.

It’s still the thing that gets Houston small businesses into the most trouble.

I’ve cleaned up payroll messes for hundreds of businesses across Houston — from a taco truck owner in the East End who didn’t know he needed to file Form 941 quarterly, to a staffing agency on the Southwest Freeway that accumulated $200,000 in payroll tax penalties because their internal bookkeeper wasn’t making deposits on time.

Payroll is where the IRS gets aggressive. They don’t send gentle reminders for payroll tax violations. They send trust fund recovery penalties that pierce your LLC and attach to you personally.

Here’s every piece of the payroll puzzle for Texas small businesses in 2026.

What Texas Employers Must Withhold

Even without a state income tax, you’re still withholding and remitting several taxes from every employee’s paycheck.

Federal Income Tax Withholding

Based on each employee’s W-4 form, you withhold federal income tax from every paycheck. The amount depends on their filing status, dependents, and any additional withholding they’ve elected.

The 2026 withholding tables are published in IRS Publication 15 (Circular E). If you use payroll software or a service like Gusto or QuickBooks Payroll, the software handles the calculation automatically. If you’re running payroll manually — which I strongly advise against for any business with more than two employees — you need those tables.

Social Security and Medicare (FICA)

Every employer withholds 6.2% for Social Security and 1.45% for Medicare from each employee’s wages. The employer matches both amounts, making the total FICA contribution 15.3%.

The Social Security wage base for 2026 is $176,100. Once an employee’s earnings exceed that amount, you stop withholding the 6.2% Social Security tax. Medicare has no wage cap — it applies to all earnings.

For employees earning over $200,000, there’s an additional 0.9% Medicare surtax. The employee pays this; the employer doesn’t match it. But you’re responsible for withholding it once wages cross the $200,000 threshold.

No State Withholding

This is where Texas diverges from most states. You don’t withhold state income tax. You don’t withhold state disability insurance. You don’t withhold any state-level payroll tax from employees.

This saves processing time and eliminates an entire category of compliance. But it also means Houston business owners sometimes forget that the federal obligations still exist. “Texas doesn’t have state income tax” becomes “I don’t need to worry about payroll taxes” in the minds of first-time employers. That mental shortcut is dangerous.

What Texas Employers Must Pay

Beyond the employee withholding, you owe employer-side taxes.

Employer FICA Match

You match the 6.2% Social Security and 1.45% Medicare that you withheld from the employee. This is your expense, not the employee’s. Budget for it. On a $50,000 salary, your FICA match is $3,825.

Federal Unemployment Tax (FUTA)

FUTA is 6.0% on the first $7,000 of each employee’s annual wages. However, you receive a credit of up to 5.4% if you pay your state unemployment taxes on time, making the effective FUTA rate 0.6%.

On 10 employees, your annual FUTA liability is about $420 (10 x $7,000 x 0.6%). Not a large number, but it’s due quarterly and missing it creates penalties.

Texas Unemployment Insurance (UI)

This is the one Texas-specific employer tax. The Texas Workforce Commission (TWC) administers unemployment insurance. As a Texas employer, you pay UI tax on the first $9,000 of each employee’s annual wages.

Your tax rate depends on your experience rating — basically, how many former employees have filed unemployment claims against you. New employers start at 2.7%. Rates range from 0.31% to 6.31% depending on your claims history.

A Houston business with 20 employees and a 2.7% rate pays: 20 employees x $9,000 x 2.7% = $4,860/year

You report and pay TWC quarterly through the Employer Benefits Service portal. Due dates: April 30, July 31, October 31, and January 31 for the prior quarter.

Deposit Schedules: When the IRS Wants the Money

This is where most problems start. The IRS has specific deposit schedules for payroll taxes, and they’re not the same for every business.

Monthly Depositors

If your total payroll tax liability (federal income tax withheld + employee FICA + employer FICA match) was $50,000 or less during the lookback period (July 1, 2024 through June 30, 2025 for the 2026 filing year), you’re a monthly depositor.

Monthly deposits are due by the 15th of the following month. January payroll taxes are due by February 15. February by March 15. And so on.

Semi-Weekly Depositors

If your total payroll tax liability exceeded $50,000 during the lookback period, you’re a semi-weekly depositor. The schedule depends on your pay date:

• Wednesday, Thursday, or Friday payroll: Deposit by the following Wednesday
• Saturday, Sunday, Monday, or Tuesday payroll: Deposit by the following Friday

Semi-weekly depositing is tighter but not unmanageable with payroll software handling the scheduling.

The $100,000 Next-Day Rule

If you accumulate $100,000 or more in payroll tax liability on any single day, you must deposit the next business day. This applies regardless of whether you’re normally a monthly or semi-weekly depositor. Once triggered, you become a semi-weekly depositor for the rest of the year and the following year.

This rule catches fast-growing Houston businesses off guard. A staffing company that suddenly lands a big contract and doubles headcount can hit the $100,000 threshold on a single payroll run.

How to Deposit

All payroll tax deposits must be made electronically through the Electronic Federal Tax Payment System (EFTPS). You cannot mail a check for payroll tax deposits. EFTPS enrollment takes 5-7 business days, so set it up before you run your first payroll.

Quarterly and Annual Filings

Form 941 — Quarterly

Filed four times a year (April 30, July 31, October 31, January 31) reporting:

• Total wages paid
• Federal income tax withheld
• Employee and employer FICA amounts
• Total deposits made during the quarter
• Any balance due or overpayment

If your annual payroll tax liability is $1,000 or less, you can file Form 944 annually instead. The IRS designates which form you should use — you can’t just choose.

Form 940 — Annual FUTA

Filed by January 31 of the following year. Reports your FUTA tax liability and credits for state unemployment tax payments. If your total FUTA tax exceeds $500 during the year, you must deposit quarterly.

W-2s — Annual

Due to employees by January 31. Filed with the Social Security Administration by January 31 (electronic) or January 31 (paper). Every W-2 must match your quarterly 941 reports. Discrepancies trigger IRS inquiries.

TWC Quarterly Report

Filed with the Texas Workforce Commission by the end of the month following each quarter. Reports wages paid and calculates your Texas UI tax.

The Trust Fund Recovery Penalty: Why Payroll Tax Debt Is Different

Federal payroll taxes are divided into two categories: the trust fund portion (federal income tax withheld + employee FICA) and the non-trust fund portion (employer FICA match + FUTA).

The trust fund portion is money that legally belongs to your employees. You withheld it from their paychecks and are holding it in trust for the government. If you don’t send it to the IRS, that’s not just a tax debt — it’s treated as a breach of fiduciary duty.

The Trust Fund Recovery Penalty (TFRP), sometimes called the 100% penalty, makes any “responsible person” personally liable for the trust fund taxes. This pierces the LLC or corporate veil. The IRS can come after your personal bank accounts, your personal property, and your personal income.

Who’s a “responsible person”? Anyone with authority over the business’s financial decisions who willfully failed to pay. That’s typically the owner, but it can include:

• A bookkeeper who decided which bills to pay
• A CFO or controller
• A partner or board member with check-signing authority
• Even a payroll service provider in some cases

“Willfully” doesn’t mean you intended to cheat the government. It means you knew the taxes were due and chose to pay something else instead. Using payroll tax money to make rent, buy inventory, or pay vendors is willful. The intent to defraud isn’t required.

I had a concrete company owner in Pasadena who fell behind on payroll deposits during a slow stretch. He used the withheld money to buy materials for a big job, planning to deposit the taxes when the payment came in. The payment was late. The IRS assessed the TFRP against him personally — $83,000.

We got the penalty reduced through an installment agreement, but the personal liability was real. His personal credit was affected. His personal bank account was at risk.

This is why I tell every Houston business owner: payroll taxes come first. Before rent. Before vendors. Before materials. The IRS doesn’t care about your cash flow problems — they care about the money you took from your employees and didn’t send in.

Choosing a Payroll System

For Houston small businesses, the options fall into three categories.

DIY / Manual Payroll

Calculating withholding manually, writing checks, making your own EFTPS deposits, and filing your own 941s and W-2s.

I don’t recommend this for any business with more than two employees. The calculation is complex, the deposit deadlines are unforgiving, and one mistake cascades into penalties. The time you spend processing payroll is time not spent running your business.

The only businesses where manual payroll makes sense: a sole proprietor who is the only employee (paying yourself from an S-corp) and has the accounting background to handle it correctly.

Payroll Software (Gusto, QuickBooks Payroll, ADP Run)

You enter hours and rates. The software calculates withholding, generates pay stubs, makes EFTPS deposits, and files quarterly and annual returns.

We’re a Gusto partner and most of our Houston clients use either Gusto or QuickBooks Payroll. Both handle Texas-specific requirements well, including TWC quarterly reports.

Cost: $40-$80/month base plus $6-$12 per employee. For a 10-person company, you’re looking at $100-$200/month. That’s a fraction of the cost of one payroll mistake.

Full-Service Payroll Provider

Companies like ADP, Paychex, or local payroll firms handle everything: processing, deposits, filings, W-2s, and even workers’ comp administration. Higher cost ($200-$500+/month depending on headcount), but they take on liability for processing errors.

For businesses with 50+ employees or complex payroll needs (multiple pay schedules, commission structures, multi-state employees), a full-service provider makes sense.

Texas-Specific Payroll Requirements

Payday Rules

Texas requires employers to pay employees at least twice per month (semi-monthly) unless the employee is exempt (salaried). You can pay weekly or biweekly — the law just sets a minimum frequency.

Commissions can be paid once per month if you’ve notified the employee in writing.

Pay Stub Requirements

Texas doesn’t require pay stubs by state law, but federal law requires that employees receive enough information to understand their deductions. In practice, every payroll system generates pay stubs automatically, so this is a non-issue for any business using software.

Final Paycheck Timing

When an employee is terminated, their final paycheck is due within 6 calendar days. If the employee quits, the final paycheck is due on the next regular payday.

Overtime

Texas follows federal FLSA rules: non-exempt employees receive 1.5x their regular rate for hours over 40 in a workweek. There’s no daily overtime requirement (unlike California’s 8-hour rule). Texas also doesn’t allow comp time in lieu of overtime pay for private-sector employees.

Workers’ Compensation

Texas is the only state where workers’ comp insurance is not mandatory for private employers. You can operate without it. But — and this is a significant “but” — operating without workers’ comp in Texas means you lose several legal protections. Injured employees can sue you directly and you can’t use common law defenses (contributory negligence, assumption of risk, fellow employee negligence).

Most Houston businesses with employees should carry workers’ comp regardless of the legal option to skip it. The liability exposure without it is substantial.

Common Payroll Mistakes

Classifying employees as contractors to avoid payroll. This is the most expensive mistake and the one the IRS pursues most aggressively. We wrote an entire article on employee vs. independent contractor classification because the penalties are devastating.

Late deposits. Even one day late triggers a penalty. The penalty scales: 2% for deposits 1-5 days late, 5% for 6-15 days late, 10% for deposits more than 15 days late, and 15% for amounts still unpaid more than 10 days after the IRS issues a notice. On a $10,000 deposit, being two weeks late costs $500.

Mismatched W-2s and 941s. The total wages and withholding reported on all W-2s for the year must match the total reported on your four quarterly 941 filings. Discrepancies trigger IRS inquiries that eat time and create anxiety.

Not adjusting estimated payments for owner compensation. S-corp owners who take a salary need withholding set correctly. Owners who take distributions instead of (or in addition to) salary need to make quarterly estimated payments. Missing this creates a year-end tax surprise.

Ignoring TWC reporting. Texas unemployment insurance reporting is separate from IRS reporting. Filing late with TWC results in penalties and can increase your UI tax rate for future years.

How We Handle Payroll for Houston Businesses

We set up and manage payroll for Houston small businesses through Gusto and QuickBooks. The process:

1. Set up the payroll account and enroll in EFTPS
2. Register with the Texas Workforce Commission
3. Onboard employees (W-4s, I-9s, direct deposit)
4. Process payroll on schedule
5. Verify deposits are made on time
6. File 941s quarterly and W-2s annually
7. File TWC quarterly reports
8. Review annually for classification issues and rate changes

Payroll is not something to figure out as you go. The penalties are real, the timelines are tight, and the personal liability on trust fund taxes makes this the one area where mistakes hit hardest.

If you’re starting a business in Houston, hiring your first employee, or cleaning up a payroll mess, talk to our team. We’ll set it up right the first time or fix what’s broken.