How to Run Payroll in Texas (2025): A Complete Step-by-Step Guide for Small Business Owners By TexasPayroll.com — Powered by BrightPath Pay & People Solutions

A Houston business owner once told me:

“I thought running payroll in Texas would be easy — until the IRS sent me a letter over a $38 withholding error.”

He’s not alone. Texas is an easy state for employers on paper, but real-world payroll mistakes still lead to:

• IRS notices

• Texas Workforce Commission (TWC) penalties

• misclassified employees

• late tax filings

• incorrect unemployment rates

• unexpected back-pay liability

The good news? If you follow a clean process — the right process — payroll in Texas becomes simple, accurate, and stress-free.

This guide is written specifically for:

• small business owners

• growing companies

• first-time employers

• HR managers in Texas

• accountants/bookkeepers

• anyone running Texas payroll manually or switching processors

  
  

Step 1: Register Your Business to Legally Run Payroll in Texas

Before you pay even one employee, you must be registered with:

✔ The IRS

You need an Employer Identification Number (EIN).

This is the ID used for:

• Payroll tax withholding

• Quarterly federal reports

• Employee W-2s

• Business banking

• Payroll software setup

Apply online at IRS.gov — approval is instant.

✔ The Texas Workforce Commission (TWC)

Required for Texas State Unemployment Tax (SUI).

Every employer in Texas must register if they:

• pay $1,500+ in wages in a quarter, OR

• have one or more employees for at least 20 weeks in a year

TWC assigns your business a:

• TWC tax account number

• Unemployment Insurance Tax Rate (2.7% for new employers)

Common Texas mistake

New businesses often forget to register with TWC, thinking payroll software “handles everything.” It doesn’t.

TWC sends penalty letters when:

• a business pays employees without a registered account

• wages are reported late

• SUTA isn’t filed

This is why many Texas employers get retroactive SUTA assessments in their first year.

Step 2: Collect Required Employee Documents (Federal + Texas)

Texas is simple, but federal requirements still apply. Before running payroll, you must collect:

✔ Form W-4 (Employee’s Withholding Certificate)

Determines federal income tax withholding.

✔ Form I-9 (Employment Eligibility Verification)

Must be completed within the first 3 days of employment.

✔ Texas New Hire Reporting

Must be filed within 20 days of hire.

✔ Direct Deposit Authorization

Not required by law, but recommended.

✔ Any relevant employee agreements:

• pay frequency

• overtime eligibility

• job description

• PTO / sick leave

• classification (exempt or non-exempt)

Texas-specific risk

The # 1 reason Texas employers get audited is misclassification — especially in Dallas, Austin, and Houston.

If an employee is mis-labeled as “exempt,” “salary,” or “contractor,” the business becomes liable for:

• unpaid overtime

• back wages

• unpaid payroll taxes

• penalties

• liquidated damages

This frequently happens in:

• HVAC / trades

• Construction

• Restaurants

• Tech startups

• Home health

• Staffing companies

• Retail

  
  

Step 3: Choose a Payroll Schedule That Meets Texas Requirements

Texas allows any of the following:

• Weekly

• Biweekly (every 2 weeks)

• Semimonthly (twice monthly)

• Monthly

BUT Texas has a strict rule:

Hourly (non-exempt) employees must be paid at least twice per month.

(Texas Labor Code § 62.003)

If you pay hourly workers monthly, TWC can issue compliance notices or penalties.

Best practices in Texas

• Salaried employees → semimonthly or biweekly

• Hourly employees → biweekly or weekly

Biweekly is the most popular because it simplifies overtime calculations.

Step 4: Track Employee Time Accurately (Texas + Federal Requirements)

Texas follows federal FLSA rules:

Employers must track:

• Hours worked

• Overtime

• Breaks (if paid)

• Travel time (if compensable)

• On-call time

• Remote/hybrid hours

Real Texas enforcement example:

Between 2020–2024, the DOL Wage & Hour Division issued millions of dollars in back pay to Texas employees because hours were not properly tracked or paid — especially in:

• Hospitality

• Tech

• Construction

• Home health

• Logistics

Do NOT:

• “estimate” hours

• use fixed overtime amounts

• rely on verbal confirmation

• use spreadsheets long-term

TWC frequently corrects these payroll filings.

Step 5: Calculate Gross Pay → Taxes → Net Pay

This is the part that creates problems for new Texas employers.

Gross Pay (before taxes)

Hourly: hours × rateSalary: annual salary ÷ pay periods

Calculate taxes:

Employees pay:

• Federal income tax

• Social Security: 6.2%

• Medicare: 1.45%

Employers pay:

• Social Security: 6.2%

• Medicare: 1.45%

• FUTA (~$42/year per employee)

• Texas SUTA (2.7% for new employers)

Texas Example Calculation

Employee earns $1,200 weekly, married filing jointly.

Employee pays:

• Federal income tax: $98.00

• Social Security: $74.40

• Medicare: $17.40

Employer pays:

• Social Security: $74.40

• Medicare: $17.40

• FUTA: $7.20

• SUTA (2.7%): $32.40

  
  

Step 6: Pay Employees (Texas Rules)

Texas requires employees be paid:

• via check

• direct deposit

• cash (only if documented)

• payroll card (must meet legal requirements)

Direct deposit is preferred

Reduces errors, improves recordkeeping, and prevents disputes.

Employees must have access to:

• payment stubs

• pay breakdown

• tax withholdings

  
  

Step 7: File Required Payroll Taxes (Federal + Texas)

Federal Taxes (IRS)

• Monthly depositors: due by the 15th

• Semiweekly depositors: due Wed/Fri based on payroll date

• Quarterly filings (Form 941)

• Annual filings (W-2, W-3, 940)

Texas Taxes (TWC)

Texas SUTA must be filed quarterly:

• April 30

• July 31

• October 31

• January 31

TWC issues penalty notices when filings are late or wrong.

Common enforcement issue:

TWC frequently recalculates SUTA when:

• overtime wasn't included in taxable wages

• incorrect wage bases were used

• wages were reported in the wrong quarter

• manual calculations caused errors

In 2023 alone, TWC issued 84,000+ tax corrections, disproportionately affecting small businesses.

Step 8: Maintain Records (Texas + Federal)

Texas requires payroll records be kept for at least 3 years.

Federal law requires 3–4 years depending on the record type.

You must store:

• hours worked

• wages paid

• deductions

• W-4 & I-9

• timecards

• payroll journals

• tax filings

• direct deposit authorizations

• job descriptions

• classification documentation

Why this matters

Most IRS audits begin with a request for payroll documentation.

Most TWC SUTA audits begin with mismatched reported hours.

Without proper records, employers are often forced to pay estimated liabilities, which are usually higher.

Texas-Specific Payroll Pitfalls (Proven With Real Enforcement)

1. Misclassification (Dallas & Austin hot zones)

Dallas: construction firm fined $1.1M for contractor misclassification (2023).Austin: IT employer fined $740k for mislabeling employees exempt (2022).

2. Overtime errors (Austin hospitality + trades)

Austin restaurants paid $565k in back pay (2021) after a tip-credit investigation.

3. Missing BPP filings (Harris County)

HCAD penalties add 10% and inflate asset values for non-filers.

4. Manual payroll in rural counties

Thousands of SUTA corrections traced to employers using spreadsheets.

Texas Payroll Checklist (Copy This)

✔ Register with IRS & TWC

✔ Collect W-4, I-9, new hire report

✔ Determine pay schedule (Texas rules)

✔ Track hours (FLSA compliant)

✔ Calculate taxes accurately

✔ Pay employees correctly

✔ File IRS & TWC taxes on time

✔ Maintain payroll & HR records

✔ Review classifications annually

✔ Stay informed of Texas rule changes

⭐ About the TexasPayroll.com Editorial Team

The TexasPayroll.com Editorial Team consists of Texas-based Payroll Professionals, HR Compliance Researchers, and Employment Law Analysts dedicated to helping business owners run clean, compliant, and stress-free payroll. Our mission is to deliver simple, accurate, and Texas-specific guidance for employers — from small startups to growing multi-location companies across the state.

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