What Is the Texas Tax Rate for Payroll?

Understanding state-specific payroll tax obligations is important for businesses in Texas. These taxes fund programs that assist workers during periods of unemployment.

Understanding Texas’s Approach to Payroll Taxes

Texas maintains a distinct approach to payroll taxation. Unlike most states, Texas does not impose a state income tax on individual wages, so employers are not required to withhold state income tax from their employees’ paychecks.

The primary state-level payroll tax for employers in Texas is the Unemployment Insurance (UI) tax, also referred to as State Unemployment Tax Act (SUTA) tax. This tax funds the Texas Unemployment Compensation program, which provides benefits to eligible workers who lose their jobs. While federal payroll taxes, such as Federal Insurance Contributions Act (FICA) taxes for Social Security and Medicare, and Federal Unemployment Tax Act (FUTA) taxes, apply to all U.S. employers, the Texas UI tax is the main state-specific employer contribution. Texas does not have other significant state or local payroll taxes.

Texas Unemployment Insurance Tax Rates

Texas employs an experience rating system to determine an employer’s unemployment insurance tax rate. This system calculates rates based on an employer’s history of unemployment benefits paid to former employees. For new employers, a specific rate is assigned until enough experience is accumulated to calculate an individualized rate.

Newly liable employers are typically assigned a rate that is the higher of their North American Industry Classification System (NAICS) industry average or 2.7%. This predetermined rate applies until the employer has accumulated at least four “chargeable quarters.” For established employers, their individual rate is calculated annually based on their “experience,” reflecting the amount of UI benefits charged against their account.

The Texas UI tax rates have a defined range, with a minimum rate of 0.25% and a maximum rate of 6.25% for both 2024 and 2025. The tax applies to a portion of each employee’s wages, up to a specific amount known as the taxable wage base. In Texas, the taxable wage base for UI taxes is $9,000 per employee per calendar year for 2024 and 2025. An employer’s effective tax rate is the sum of several components, which can include the General Tax Rate (GTR), Replenishment Tax Rate (RTR), Obligation Assessment Rate (OA), Deficit Tax Rate (DTR), and Employment and Training Investment Assessment (ETIA).

Calculating Texas UI Tax Liability

To calculate Texas UI tax liability for a given pay period, an employer multiplies their assigned UI tax rate by the taxable wages paid to each employee. For example, if an employer’s assigned UI tax rate is 1.5% and an employee earns $1,000 in a pay period, the tax applies to the taxable portion of the wages. If the employee’s cumulative wages for the year are below the $9,000 taxable wage base, the entire $1,000 is subject to the UI tax for that period.

Once an employee’s cumulative wages for the calendar year reach the $9,000 taxable wage base, any subsequent wages paid to that employee are no longer subject to the Texas UI tax. This ensures employers only pay UI tax on the first $9,000 of wages earned by each employee annually. The Texas UI tax is paid solely by the employer and is not withheld from employee wages.

Employer Responsibilities and Rate Notifications

Each year, the Texas Workforce Commission (TWC) provides employers with a notice detailing their specific unemployment insurance tax rate for the upcoming calendar year. This notification allows businesses to adjust their payroll calculations. Employers must register with the TWC to obtain a UI tax account number for reporting wages and remitting taxes.

The TWC prefers online registration. Employers are required to file wage reports and pay their UI taxes, generally on a quarterly basis. Employers can find their current rate information and manage their account details through the TWC’s online portal.