Employer’s Guide to Texas Income Tax, Franchise Tax, UI Tax, and More

Texas’s tax environment differs significantly from many other states, which can create challenges for multi-state employers. With no state income tax—but clear rules on unemployment insurance, franchise tax, and select local taxes—payroll accuracy depends on knowing exactly what applies.

This guide provides a thorough explanation of the Texas income tax system and more, covering everything from the types of payroll and business taxes applicable to the reporting requirements and strategies for managing multi-state obligations.

How income tax works in Texas

State income tax

Texas is one of seven states in the US that don’t impose personal income tax, which means individuals don’t have to file a state-level income tax return, and employers aren’t required to withhold state or local personal income tax on behalf of their employees.

The Texas constitution also prohibits cities and counties in the state from imposing local income taxes—municipalities can only levy sales or property taxes.

Federal income tax, contributions, and deductions

While Texas has no state income tax requirement, employers are still responsible for withholding and filing federal taxes, including:

• Federal income tax: You must deduct federal income tax from your employee’s earnings based on their income band, filing status, and withholding selections. Federal income tax rates range from 10%-37%
• Social security tax: Contribute 6.2% of each employee’s earnings and withhold the same amount separately from their paycheck for social security taxes, up to the annual wage base limit. For 2025, the limit is $176,100 USD. For 2026, it’s $184,500
• Medicare tax: Employer and employee medicare tax rates each amount to 1.45% of wages. An additional 0.9% wage deduction applies to employees earning over $200,000
• Federal unemployment tax (FUTA): FUTA works hand in hand with state unemployment insurance, but unlike SUI, it is paid directly to the IRS. The standard FUTA rate for employers is 6% of the first $7,000 of each employee’s wages

How other Texas taxes impact businesses

Sales and use tax

Businesses engaged in retail sales, rentals, or leases of personal property, or sales of taxable services in Texas must pay a 6.25% sales and use tax at the state level.

Local taxing jurisdictions, such as cities, districts, and counties, may also impose additional sales and use taxes of up to 2%, bringing the maximum combined rate to 8.25%.

The office of the Comptroller of Public Accounts is responsible for overseeing and processing the majority of state and local taxes in Texas. It provides a sales tax rate locator tool where you can enter your address to determine your exact local sales and use tax rate.

Franchise tax

Certain business entities formed or operating in Texas with an annual revenue exceeding the no-tax threshold—$2,470,000 for the year 2025 and $2,650,000 for 2026—are required to file and pay franchise or margins tax, including:

• Partnerships, joint ventures, and limited liability companies
• Banks and state limited banking associations
• Corporations, S corporations, and professional corporations
• Savings and loan associations
• Trusts, business associations, and professional associations

The franchise tax rate typically ranges from 0.375%-0.75% depending on whether you are a wholesale or retail business and if you qualify to use EZ computation. Businesses with gross receipts of $20 million or less are allowed to file franchise tax using EZ computation at a rate of 0.3315 for the years 2026 and 2027.

For other entities, the taxable margin is calculated using one of four methods:

• Total revenue times 70%
• Total revenue minus compensation
• Total revenue minus cost of goods sold
• Total revenue minus $1 million

Businesses exempted from paying or filing a franchise tax return must file an information report for the year in question.

Property tax

Although Texas doesn’t have a state property tax, local authorities can set property tax rates and use the collected revenue to fund and maintain local infrastructure and services such as schools, roads, firefighting, and policing.

Property tax goes directly to the local tax unit, and rates can vary depending on the Texas county you’re in and the appraised value of the property.

State unemployment insurance (SUI)

As a Texas employer, you are required to pay SUI tax on the first $9,000 of an employee’s annual wages. This tax is used to provide support to eligible workers who are laid off or fired through no fault of their own. It is paid out of your company’s pocket, not deducted from employees’ earnings.

You’re liable to pay SUI taxes if you meet any of the following criteria:

• You are liable for FUTA and pay wages to Texas employees
• You pay $1,500 or more in gross wages in a calendar quarter
• You employ at least one part-time or full-time worker for 20 different weeks in a calendar year (the weeks don’t have to be consecutive, and the same worker need not be employed for all 20 weeks)
• You’re a non-profit organization with four or more employees in 20 different weeks
• You’re a domestic employer that pays $1,000 or more in cash wages in a quarter
• You’re an agricultural employer—farmer, ranch operator, or labor agent—with three or more workers for at least 20 weeks in a year, or who pays $6,250 or more in gross wages in a quarter
• You volunteer to pay SUI tax even though you don’t meet the criteria

SUI tax rates change from year to year and are determined by your benefit history—the number of times your employees have claimed unemployment benefits in the past—and the sum of the following elements:

• General tax rate (GTR)
• Deficit tax rate (DTR)
• Obligation assessment rate (OA)
• Replenishment tax rate (RTR)
• Employment training investment assessment (ETIA)

The SUI tax rate for 2025 is as follows:

• For experienced employers: 0.25%-6.25%
• For new employers: 2.7% or the standard industry tax rate, whichever is higher

The Texas Workforce Commission administers the collection of SUI tax and notifies businesses of their SUI tax rate for the coming year via the Unemployment Tax Services.

Residency rules and filing status

Texas residency is based on domicile, proven by moving into the state with the intent to live or locate there. A Texas resident is any person living in the state, and any business or association that has a physical location in the state.

A person qualifies as a Texas resident for tax and payroll purposes even if they are only temporarily residing in the state while maintaining permanent residence elsewhere.

Since Texas doesn’t impose state income tax, residency status is primarily used for business registration, benefits administration, and employment purposes. Also, individuals don’t file a state income tax return, so Texas has no filing statuses.

However, residency status can complicate state tax withholding, such as unemployment insurance, for remote workers who reside in multiple states.

The general rule is that employers must pay and report SUI to the state where the employee performs the majority of their services.

Texas state-level tax rates and brackets

Texas does not have state tax rates or brackets for personal earnings. However, employees are liable for federal income tax, and employers are obligated to withhold the appropriate federal taxes from paychecks.

Here is a summary of state taxes that apply in Texas and their respective rates:

Texas tax deductions and credits

There are no state-level tax deductions or credits for individuals in Texas because they don’t pay personal income tax.

Businesses can claim specific discounts and deduct qualified expenses to reduce their sales tax and franchise tax liabilities, including:

• Prepayment discount: If you pay a reasonable estimate of your state and local sales and use tax liability before the due filing date as a monthly or quarterly taxpayer, you’ll receive a prepayment discount of 1.25%. This is in addition to the 0.5% discount that all taxpayers get for filing reports and payments on time
• Cost of goods sold (COGS) deduction: You’re allowed to deduct the direct costs of purchasing or producing real or tangible products that your business sells from your total revenue to lower your franchise tax bill
• Compensation deduction: Alternatively, you can reduce your franchise tax liability by deducting compensation costs, such as benefits, bonuses, and wages paid to employees, rather than COGS, from your total revenue. Payroll taxes and wages paid to independent contractors don’t qualify as compensation costs
• Research and development credit: Businesses engaged in qualified research can claim a sales and use tax exemption or a franchise tax credit on qualified expenses incurred in carrying out their research and development activities
• Clean energy credit: If you’ve completed a renewable energy project to make your business more eco-friendly, you can claim a franchise tax credit of up to $100 million or 10% of the project’s total capital cost, whichever is less

These deductions and credits are separate from those that apply at the federal level. Businesses can still claim federal tax deductions for fuel, renewable energy, childcare benefits, hiring workers from targeted groups, and other relevant business expenses on their federal returns.

Likewise, individuals can deduct personal expenses, such as retirement contributions, mortgage interest, charitable donations, student loan interest, and child tax credit on their federal income tax forms.

Filing and payment details

Individuals in Texas are not required to file a personal state income tax return. However, other Texas taxpayers must adhere to the following filing requirements and dates to avoid penalties for non-compliance:

For franchise tax

Businesses can file their Texas Franchise Tax report online annually using the Webfile system on the Texas Comptroller’s website or third-party software and form providers. Those unable to file electronically can use downloadable report forms and mail them to the Comptroller’s office.

• Due date: May 15 each year, or the next business day if May 15 falls on a weekend or legal holiday
• Non-compliance penalties: You will pay a $50 penalty on any franchise tax report filed after the due date. A 5% penalty will apply if the tax is paid within 1-30 days after the due date, increasing to 10% for payments later than 30 days. Interests will also begin accruing on unpaid franchise tax 61 days after the due date
• Additional documentation: LLCs, corporations, limited partnerships, financial institutions, and professional associations must file a Public Information Report (PIR) alongside their franchise tax return. Other businesses must file an Ownership Information Report (OIR) with their franchise tax report

For sales tax

After applying for a Texas sales tax permit and getting approved, you will receive a notice via mail informing you of whether you are to file your sales and use taxes yearly, monthly, or quarterly.

Yearly filers must submit their sales reports and taxes for the preceding year on January 20.

For monthly filers, the due date is the 20th of the month following the month you’re reporting for. For example, a sales tax report for January is due February 20.

For quarterly filers, the reporting deadlines are as follows:

• Jan – Mar due April 20
• Apr – Jun due July 20
• Jul – Sept due October 20
• Oct – Dec due January 20

Late sales tax reports will carry a $50 penalty, while late payment of sales tax will incur a penalty of between 5%-10% of the amount due.

For unemployment insurance tax

Employers who are liable for state unemployment insurance must register with the Texas Workforce Commission (TWC) via the Unemployment Tax Registration (UTR) within 10 days of becoming liable.

Once registered, you’ll be issued a TWC tax account number immediately and sent a notice informing you of your SUI rate within two weeks. From then on, you’re required to file your wage reports (Form C-3) and pay SUI contributions quarterly using one of these electronic methods:

• Unemployment Tax Service
• QuickFile
• Third-party payroll software

The deadline for submitting wage reports and SUI tax payments is the last day of the month following the end of each quarter, or the next business day if the deadline falls on a weekend or legal holiday.

Failure to pay SUI tax on time will result in monthly interest charges of 1.5% on outstanding balances. Late reporting will result in penalties of $15 or more, depending on how long after the due date the report is filed.

To ensure accurate calculation and recordkeeping, employers must also report new hires or rehired employees through the Texas New Hire Reporting program within 20 days of their resumption date.

For federal taxes

Your Texas employer obligations include filing and paying federal income tax, Federal Insurance Contributions Act (FICA) taxes, and FUTA according to the schedule below:

If your monthly or semi-weekly FICA and Federal income tax liability for wages paid on any day in that period is over $100,000, you must pay the tax by the next business day.

What employers and workers should know about Texas income tax

Whether you are managing a workforce or personal finances, the Texas tax structure has significant implications and considerations that should be taken into account when tax planning and making other strategic decisions.

Simplified payroll processing

The non-existence of state income tax in Texas makes payroll processing less complicated than in most states. You only have to withhold federal taxes from your employees’ wages, drastically reducing your accounting and compliance workload whenever tax filing season comes around.

Higher take-home pay for employees

Texas employees keep a larger share of their salaries and wages than employees in states with income tax. This extra income can lead to increased savings, investments, and disposable income, helping them achieve a better quality of life and boosting employee engagement and satisfaction rates.

Multi-state compliance challenges

Whether you are a Texas-based company that employs remote workers who live in other states, or you are based elsewhere and have employees in Texas, you must correctly withhold appropriate state taxes for those employees.

This means staying updated on specific regional tax requirements, tracking employee location changes, using different calculation methods, organizing and maintaining multiple state tax records, and figuring out which tax rules to apply based on employee residency status.

See also: State Tax Reciprocity: Filing Your Taxes Made Easy

Complex business tax obligations

While Texas businesses are not subject to corporate income tax, they must still comply with franchise tax and state and/or local sales tax requirements. Effective compliance can help avoid or reduce the risk of penalties for missing filing deadlines, misclassifying workers, miscalculating liability, or making payments through the wrong channels.

All of this can be tricky to figure out, particularly for newcomers, but with the help of the right tools like Deel Payroll, you can effortlessly juggle payroll and tax obligations for multiple states and beyond.

Deel automates withholdings or non-withholdings in real time based on employee location, eliminating manual data entry, calculations, and errors, while keeping all your payroll and tax records in one centralized location for easier administration.

Simplify payroll and compliance in every state with Deel

Texas offers one of the most favorable tax environments in the country, thanks to the absence of personal and corporate income taxes. While this reduces compliance burdens, your employer tax obligations remain substantial.

Official sources such as the Texas Comptroller’s Office, TWC, and the IRS websites can provide guidance when navigating requirements. You can take the stress of tracking payroll and deductions, updating employee records, and filing returns and payments on time off your plate by relying on Deel.

Deel Payroll US offers an end-to-end solution to help you stay compliant across all 50 states, from no-tax states like Texas to high-tax states like California. Book a Deel Payroll demo to see how you can remain compliant with ease and maximize business productivity.