Payroll Tax Filing and Compliance in Texas: What Employers Must Know

Employers in Texas are responsible for meeting federal and state payroll tax obligations. Even though the state does not have an income tax, companies must still handle federal withholding, social security, Medicare, and unemployment tax while registering with the Texas Workforce Commission for unemployment insurance. Managing these requirements helps employers stay compliant, avoid errors, and keep payroll records accurate.

Filling out payroll tax requirements in Texas involves several steps that may feel overwhelming for first-time business owners. You must register, prepare the correct form, pay on time, and report details directly to the IRS or TWC. Employers can manage the process with payroll provider software, through a tax preparer, or using e-file options like IRS Direct or Free File. Each method has criteria and fees, so selecting the right choice depends on your company’s size, cost considerations, and resource access.

Compliance is more than paperwork—it affects your employees, tax account, and financial institution relationships. Mistakes can lead to penalties, delayed refunds, and higher costs to correct. This guide will provide clear step-by-step guidance on the filing process, payment options, deadlines, and resources available so that employers can confidently prepare, manage payroll efficiently, and learn how to respond if they owe taxes or receive notices.

Payroll Tax Basics for Texas Employers

Understanding the payroll tax requirements in Texas starts with knowing the difference between federal and state obligations. Employers must withhold, pay, and report taxes correctly to stay compliant. While Texas offers advantages like no state income tax, businesses still need to handle federal requirements and register with the Texas Workforce Commission for unemployment contributions.

Federal Payroll Tax Requirements

Employers must manage several types of federal taxes. These include:

• Federal income tax withholding
  Employers are required to withhold income tax from employee wages based on Form W-4 elections. The IRS provides tables and tools to help employers estimate and withhold the correct amount.
  
  
• Social Security tax
  The employer and the employee contribute 6.2 percent of their wages, up to a specified annual wage base. Employers withhold this from employee pay and match the contribution.
  
  
• Medicare tax
  Employers and employees pay 1.45 percent of all wages, with no income limit. High earners may owe an additional Medicare tax.
  
  
• Federal unemployment tax (FUTA)
  Employers pay FUTA 6.0 percent on the first $7,000 of each employee’s wages. A credit of up to 5.4 percent may apply if state unemployment taxes are paid, lowering the effective rate.

Employers file these requirements through a federal return, such as Form 941 for quarterly employment taxes and Form 940 for annual FUTA. Electronic filing (e-file) is encouraged, and many taxpayers use IRS Direct File, Free File, or payroll provider software to reduce errors and speed up completion.

Texas State Payroll Tax Requirements

Texas does not require withholding for state income tax. However, employers must register with the Texas Workforce Commission and pay unemployment insurance tax. New employers typically pay 2.7 percent on the first $9,000 of wages for each employee, with rates adjusted later based on the employer’s history.

Employers file reports and make payments through the Unemployment Tax Services online system. The process requires registration, setting up a tax account, and using secure access provided by the department. Employers can view payments, select filing options, and complete forms online with a computer. 

The TWC also provides information in English and Spanish, ensuring companies can access the guidance they need. Texas makes the process easier by requiring a single state unemployment system, eliminating the need to report to multiple agencies. Employers should note the due date for quarterly reports and ensure funds are available in their financial institution before scheduling payments.

Payroll Tax Filing and Payment Process

Payroll taxes involve separate but connected responsibilities at the federal and state levels. Employers must prepare the correct form, report income, make timely payments, and use secure e-file systems provided by the IRS and the Texas Workforce Commission.

Federal Filing Process

Employers must complete several required federal returns:

• Employers must file Form 941 quarterly to report the quarterly income tax withheld from employees’ wages and Social Security and Medicare contributions. The form must be submitted by the last day of the month that follows each quarter.
  
  
• Employers must submit Form 940 annually to report the federal unemployment tax. This form is due by January 31.
  
  
• Employers must provide Forms W-2 and W-3 to employees and the Social Security Administration by January 31 to record wages and withholdings properly.

Deposits for payroll taxes depend on whether you are a monthly or semi-weekly depositor. All payments are made through the Electronic Federal Tax Payment System (EFTPS). Employers can simplify the process using the IRS Direct File, Free File, or payroll provider software. This helps reduce errors, lower costs, and correctly apply payments to the tax account. Using e-file improves accuracy and speeds up processing.

Texas Filing Process

Texas requires employers to report unemployment wages and pay taxes quarterly. The process is managed online through the Unemployment Tax Services (UTS) system:

1. Employers must register with the Texas Workforce Commission and create an online tax account to file reports.
   
   
2. Employers must file quarterly unemployment reports that show wages paid to each employee.
   
   
3. Employers must submit unemployment tax payments electronically, either through their financial institution or directly in the UTS portal.

Quarterly reports are typically due on the last day of the month following each quarter. Filing through the UTS system is free and secure, confirming that the report has been received. Employers can view account details, select payment options, and confirm submissions online. The locked padlock icon on the TWC page indicates security.

Setting Up Payroll Systems for Compliance

Employers hiring staff for the first time must take several steps to set up payroll systems properly. This ensures compliance with Texas's federal and state payroll tax requirements and creates a reliable process for managing employee wages and taxes.

Key Steps for Setup

1. Employers must register with the IRS and obtain an Employer Identification Number (EIN) to file every federal return.
   
   
2. To establish their state account, employers must register with the Texas Workforce Commission within 10 days of becoming liable for unemployment insurance tax.
   
   
3. Employers should select a payroll system that fits their needs, whether it's payroll software, a payroll provider, or a tax preparer. Each option has fees, features, and support levels to consider.
   
   
4. Employers must collect and maintain employee forms, including Form W-4 for federal income tax withholding and Form I-9 for employment eligibility. Keeping Social Security numbers and identification on file is also required.
   
   
5. Employers need to establish a process for making tax payments and keeping records. Records should include wages, withholdings, deposits, and reconciliations and be retained for at least four years.

Employers can improve accuracy by setting up filing date reminders and using payroll software that automates calculations and submissions. Payroll software or IRS.gov can directly answer questions about whether you owe additional tax or qualify for specific options.

Dealing with Payroll Tax Issues and Notices

Even with careful preparation, employers may encounter payroll tax problems. Notices from the IRS or the Texas Workforce Commission usually indicate missed deadlines, unpaid amounts, or mistakes on a return. Responding quickly can reduce penalties and prevent additional costs.

Common Issues Employers Face

• Employers may face late deposit penalties if they miss a scheduled due date for payroll tax payments. Penalties increase the longer the payment remains unpaid.
  
  
• Employers may receive notices for missing forms, such as Form 941, Form 940, or quarterly Texas unemployment reports, which are automatically tracked by tax agencies.
  
  
• Employers may experience errors on returns, such as incorrect wage reporting or miscalculated withholdings, which can delay refunds and create problems in the tax account.
  
  
• Employers may have incomplete payments, where reported taxes do not match the amount paid, requiring reconciliation and possible correction.

How to Respond

When an employer receives a payroll tax notice, it is essential to review the document carefully. Each notice includes details about the problem, the amount owed, and the deadline for response. Employers should:

1. Verify the accuracy of the notice by comparing it to payroll records and prior filings.
   
   
2. Make any required payments promptly, either by mail or through EFTPS for federal taxes or the TWC’s online system for state unemployment taxes.
   
   
3. If clarification is needed, contact the IRS or TWC directly, keeping a record of the call, the date, and the representative’s name.
   
   
4. If you cannot pay in full, request guidance on payment options, such as installment agreements or short-term extensions.

Employers remain legally responsible for compliance, even when using a payroll provider or tax preparer. Taking immediate action helps avoid additional fees, ensures funds are credited correctly, and protects the business’s financial stability.

Payment and Resolution Options

Employers who owe taxes or cannot make timely payments still have several options for resolving payroll tax issues. The IRS and the Texas Workforce Commission provide relief processes, although federal options are generally more flexible.

Federal Relief Options

• Employers may apply for a short-term payment plan if they owe less than $100,000. These plans allow up to 120 days to complete payments with minimal fees.
  
  
• Employers may request a long-term installment agreement for larger balances. Though interest and setup fees apply, this arrangement spreads payments into manageable monthly amounts.
  
  
• Employers who cannot pay the full balance may qualify for an offer in compromise. This option allows settlement for less than the total owed but requires extensive financial information.
  
  
• Employers facing severe financial hardship may request the Currently Not Collectible status, temporarily delaying collection. The balance remains, but enforcement actions are paused until the employer’s situation improves.
  
  

Texas Relief Options

• Employers who cannot pay state unemployment taxes should contact the Texas Workforce Commission early through their online system. Early communication shows good faith and may prevent additional penalties.
  
  
• Employers must provide financial documentation showing why they cannot pay the balance in full. TWC will review this information before offering payment options.
  
  
• Employers must stay current on future obligations while paying down any existing balance. Missing new deposits can disqualify an employer from payment arrangements.

Appeals and Dispute Resolution

Sometimes, employers disagree with tax agency findings. Both federal and state systems provide a formal process for appealing notices, assessments, or penalties.

Federal Appeals Process

• Employers may request an informal appeal for amounts under $25,000 per period. This process involves providing simple explanations and supporting documents.
  
  
• Employers can file a formal protest when larger amounts are in dispute. This requires a statement outlining facts, legal arguments, and supporting details.
  
  
• Employers who cannot resolve the issue through appeals may petition the U.S. Tax Court. This step allows disputes to be reviewed without paying the amount in advance.

Texas Appeals Process

• Employers must respond within 30 days of receiving a TWC determination if they wish to appeal. Missing the deadline usually ends the appeal rights.
  
  
• Employers may request an administrative hearing, where a TWC officer reviews evidence and testimony before issuing a decision.
  
  
• Employers who disagree with the decision can appeal to a state district court, but this process requires legal preparation and additional costs.

Professional Help and Resources for Employers

Managing payroll tax Texas requirements can be complex, especially for first-time business owners. Professional support can reduce errors, save money, and provide peace of mind.

• Employers can hire a Certified Public Accountant (CPA) to prepare payroll forms, file returns, and provide tax planning. A CPA can also represent the employer before the IRS.
  
  
• Employers may work with an enrolled agent, licensed to represent taxpayers in disputes and help with payment plans or appeals.
  
  
• Employers may choose a tax attorney for complex cases involving legal disputes, court appeals, or potential criminal charges.
  
  
• Employers may use a payroll provider or software to automate wage calculations, deposits, and filings. This option simplifies payroll management but does not remove the employer’s responsibility.
  
  
• Employers can contact the Taxpayer Advocate Service, a free IRS program that helps businesses resolve complex tax issues when regular channels are ineffective.
  
  
• Employers should regularly visit IRS.gov and TWC.texas.gov for official guidance, forms, and updates. These sites also provide resources in Spanish and include clear indicators, such as a locked padlock icon, to confirm secure access.

Final Compliance Checklist

Employers can use this checklist to confirm that they meet all Texas payroll tax requirements. Reviewing these steps regularly helps ensure accuracy, avoid penalties, and keep payroll systems organized.

Initial Setup

• Employers must obtain an Employer Identification Number (EIN) from the IRS before filing any federal return.
  
  
• Employers must register with the Texas Workforce Commission within 10 days of becoming liable for unemployment insurance tax.
  
  
• Employers must set up a payroll system through payroll software, a payroll provider, or manual preparation with a tax preparer.
  
  
• Employers must establish electronic payment accounts with EFTPS for federal taxes and the UTS system for state unemployment taxes.

Each Pay Period

• Employers must calculate wages and withholdings accurately for every employee, using the information on Form W-4.
  
  
• Employers must maintain detailed payroll records that include each employee's gross pay, deductions, and net pay.
  
  
• Employers must make payroll tax payments on schedule through their financial institution or approved electronic systems.
  
  
• Employers must keep confirmation of all deposits and reconcile them with payroll records.

Quarterly Requirements

• Employers must file Form 941 by the deadline to report federal income tax withholding, Social Security, and Medicare contributions.
  
  
• Employers must file Texas unemployment insurance reports through the UTS system by the last day of the month following each quarter.
  
  
• Employers must make required FUTA deposits during the quarter if they exceed the payment threshold.
  
  
• Employers must reconcile wage and tax records to confirm that reported amounts match payments made.

Annual Requirements

• Employers must file Form 940 by January 31 to report federal unemployment tax.
  
  
• Employers must provide Form W-2 to employees by January 31 and file Forms W-2 and W-3 with the Social Security Administration.
  
  
• Employers must review and update unemployment tax rates and payroll software settings for the new year.
  
  
• Employers must prepare year-end reconciliations to verify that all payments and filings are complete.

Ongoing Compliance

• Employers must keep all payroll records for at least four years, including wage reports, tax forms, and deposit confirmations.
  
  
• Employers must respond promptly to any notices from the IRS or TWC, noting the date, details, and instructions.
  
  
• Employers should stay informed about tax law changes by visiting IRS.gov and TWC.texas.gov for updated guidance.
  
  
• Employers should review payroll processes yearly to confirm accuracy, manage costs, and improve efficiency.

Frequently Asked Questions

What are the payroll tax obligations?

Payroll tax Texas obligations require employers to withhold federal income tax, Social Security, and Medicare, while also paying federal unemployment tax, known as FUTA. Employers do not handle state income tax but must register with the Texas Workforce Commission for unemployment reporting. Employers should manage a tax account, prepare accurate forms, and use e-file systems for secure payments. Access to gov sites provides free guidance in English and Spanish.

How can employers file payroll taxes?

Employers may prepare and file payroll taxes using IRS Direct File, Free File, payroll software, or a payroll provider. Submitting a federal return requires completing the correct form and following IRS guidance. Payments can be made online through a financial institution or mailed directly. Using an e-file is often the easiest step because it improves accuracy, provides confirmation pages, and reduces errors. Employers should note each due date carefully.

What should employers do if they owe taxes?

When an employer owes taxes, the IRS or state department will send a notice explaining the balance, the due date, and payment options. Employers should carefully check the details, prepare funds, and complete the tax payment through EFTPS or the TWC system. Employers who cannot pay in full may qualify for installment agreements. Acting quickly avoids fees, keeps the process manageable, and protects the company’s financial position.

Can a payroll provider or tax preparer help with compliance?

Yes, a payroll provider or tax preparer can handle payroll calculations, prepare returns, and submit payments for an employer. These services may reduce costs and errors using secure software, automated processes, and direct access to e-file systems. However, the employer remains responsible for completion and accuracy. Companies should view these options as a partnership that simplifies work but still requires oversight, recordkeeping, and compliance with IRS.gov and TWC.gov.

Do Texas employers withhold state income tax?

Texas does not require employers to withhold state income tax. Instead, employers focus on federal return filings, federal unemployment tax payments, and unemployment contributions to the Texas Workforce Commission. Employers must register for a tax account with the department, sign in securely, and complete quarterly reports. They can start the process online, select available options, and receive confirmation with a locked padlock icon showing that the page is secure.