What Is the Tax Rate in Texas for Payroll?
Navigate Texas payroll tax rates. Learn about state unemployment taxes, federal obligations, and unique considerations for employers and employees.
Payroll taxes are an important financial aspect for businesses, funding social programs and government initiatives. Calculated based on wages, they are a regular part of payroll processing. Understanding the payroll tax landscape is crucial for compliance and financial planning.
Absence of State Income Tax in Texas
Texas does not impose a state income tax on wages or salaries. This means employees do not have state income tax deductions, and employers are not required to withhold state income tax. While federal income tax withholding still applies, the absence of state income tax can result in higher take-home pay for employees and fewer state-level tax obligations for businesses.
Texas Unemployment Tax
Employers in Texas are subject to state unemployment insurance (UI) tax, administered by the Texas Workforce Commission (TWC). This tax is paid solely by employers and is not withheld from employee wages.
The specific unemployment tax rate varies based on several factors. For new employers, the initial tax rate for 2025 is either 2.7% or the North American Industry Classification System (NAICS) industry average, whichever amount is greater. This initial rate applies until the employer has established sufficient experience. The taxable wage base, which is the maximum amount of an employee’s wages subject to this tax in a calendar year, is $9,000 for 2025. This means that once an employee’s cumulative wages for the year exceed $9,000, no further state unemployment tax is due on their earnings for that year.
An employer’s experience rating determines their ongoing tax rate. Texas uses a “benefit ratio” system, reflecting unemployment benefits paid to former employees charged against the employer’s account. Fewer claims result in a lower rate; more claims lead to a higher rate. For experienced employers in 2025, the minimum rate is 0.25%, and the maximum is 6.25%.
The effective unemployment insurance tax rate is composed of five distinct components. These include the General Tax Rate (GTR), which is the experience-rated portion based on an employer’s benefit ratio. Other components are the Replenishment Tax Rate (RTR), the Obligation Assessment Rate (OA), the Deficit Tax Rate (DTR), and the Employment and Training Investment Assessment (ETIA). For 2025, the RTR is 0.15%, and the ETIA is 0.10%. These components collectively ensure the solvency of the state’s unemployment compensation trust fund and support workforce development initiatives.
Federal Payroll Taxes
Federal payroll taxes are mandatory for businesses in Texas, applying to both employers and employees. These taxes fund national programs, separate from state requirements. The two primary federal payroll taxes are Federal Insurance Contributions Act (FICA) and Federal Unemployment Tax Act (FUTA).
FICA includes Social Security and Medicare taxes. Both employers and employees contribute. For 2025, the Social Security tax rate is 6.2% for both employer and employee, applied to wages up to a taxable wage base of $176,100. Wages earned above this threshold are not subject to Social Security tax.
The Medicare tax rate is 1.45% for both the employer and the employee, with no wage base limit, meaning all covered wages are subject to this tax. An additional Medicare tax of 0.9% applies to individual wages exceeding $200,000, paid only by the employee.
FUTA is another federal payroll tax, paid exclusively by employers. This tax funds federal unemployment benefits. The standard FUTA tax rate is 6.0% on the first $7,000 of each employee’s wages.
Employers can typically receive a credit of up to 5.4% against their FUTA tax liability for timely payments made to state unemployment insurance programs. This credit can reduce the effective FUTA tax rate to as low as 0.6%. If a state has outstanding federal unemployment benefit loans, employers may experience a FUTA credit reduction, resulting in a higher effective rate.
Other Texas Taxes Not Directly on Payroll
Businesses in Texas may encounter other state taxes not directly levied on payroll. A notable example is the Texas Franchise Tax. This tax is imposed on the privilege of doing business in Texas, based on a company’s margin (total revenue less certain deductions). It is distinct from payroll taxes, as it does not involve withholding from employee paychecks or direct contributions based on wages. Its calculation and reporting requirements are separate from state unemployment insurance or federal payroll taxes.