Payroll taxes are one of those areas where small mistakes compound quickly and where Houston business owners consistently run into the same problems. Whether it’s miscalculating deposit schedules, misclassifying workers, or simply not understanding what Texas requires on top of federal obligations, payroll errors are among the most costly compliance mistakes a business can make.
The good news: every one of these mistakes is preventable with the right systems and the right guidance in place.
At Riley & Company, we’ve worked with Houston businesses across construction, healthcare, real estate, manufacturing, and professional services for over 25 years. Here’s what we see most often and what to do about it.
Texas is one of the most employer-friendly states in the country and one of the most misunderstood when it comes to payroll obligations.
The most important thing to know: Texas has no state income tax. That means you don’t withhold state income tax from employee paychecks a significant difference from most other states. However, that doesn’t mean Texas employers have no state-level obligations. Far from it.
Texas employers are still responsible for:
Understanding the interaction between all of these particularly the FUTA credit and the TWC rate is where many Houston business owners get tripped up.
The Texas Workforce Commission administers the state’s Unemployment Insurance tax — and it’s the one that generates the most confusion for Texas employers.
Key 2026 figures:
Your TWC rate is made up of five components: General Tax Rate (GTR), Replenishment Tax Rate (RTR – 0.21% for 2026), Obligation Assessment Rate, Deficit Tax Rate, and Employment and Training Investment Assessment. New employers start at 2.70% and develop an experience rating after four chargeable quarters.
One point that often catches employers off guard: missing a TWC filing deadline doesn’t just mean a late payment it can negatively impact your General Tax Rate going forward. Consistent, on-time filing protects your rate. Missed filings can raise it.
1. Getting the Federal Deposit Schedule Wrong
Federal payroll taxes income tax withheld plus FICA must be deposited on a schedule determined by your total tax liability during the IRS lookback period. There are two schedules:
Many business owners don’t know which schedule they’re on or assume they’re on monthly when they’ve crossed into semi-weekly territory. The IRS charges penalties for late deposits that start at 2% and increase rapidly with the number of days late, reaching up to 15% for amounts still unpaid more than 10 days after an IRS notice.
Reviewing your deposit schedule at the start of each year and again if your payroll grows significantly is essential. Our payroll services include deposit schedule management so nothing gets missed.
2. Misclassifying Employees as Independent Contractors
Worker classification is one of the IRS’s most active enforcement areas and one of the most consequential errors a business owner can make. Misclassifying an employee as an independent contractor means you haven’t withheld income tax, haven’t paid the employer’s share of FICA, and haven’t filed the right forms.
The liability exposure is significant: back taxes, interest, penalties, and potential TWC audit activity. The IRS uses a multi-factor test focused on behavioral control, financial control, and the type of relationship and the fact that you’re paying someone on a 1099 doesn’t automatically make them a contractor.
Common misclassification situations we see in Houston: construction subcontractors who work exclusively for one general contractor, healthcare workers brought on as “contract” staff for extended periods, and office staff reclassified as contractors to avoid benefits costs. If the arrangement looks like employment, the IRS will likely treat it that way.
3. Missing or Late W-2 and 1099 Filings
W-2s must be furnished to employees and filed with the Social Security Administration by January 31 of the following year. 1099-NEC forms for independent contractors must also be issued and filed by January 31.
Missing these deadlines triggers per-form penalties that increase the longer the filing is delayed. For small businesses filing a significant number of forms, these penalties can add up quickly and there’s no grace period.
The underlying problem is almost always a bookkeeping issue: income and contractor payments haven’t been tracked consistently throughout the year, so the January scramble becomes a stressful and error-prone exercise. Clean, current accounting records make year-end payroll reporting straightforward rather than chaotic.
4. Not Registering With the TWC When Required
Any Texas employer who pays wages of $1,500 or more in a calendar quarter, or who has at least one employee on any given day in 20 different weeks during the year, is required to register with the TWC and establish an unemployment tax account.
Many new business owners don’t realize they’ve crossed this threshold until well after the fact and retroactive registration comes with back taxes and potential penalties. If you’ve been paying employees without a TWC account, the right move is to get registered promptly rather than wait to be contacted.
5. Treating Owner Compensation Incorrectly in S-Corps
For S-Corp owners who work in the business, the IRS requires a reasonable salary subject to payroll taxes before taking distributions. Getting this wrong in either direction creates problems.
Paying too little salary (or none at all) is a significant audit trigger and results in back payroll taxes plus penalties. Paying too much salary eliminates the self-employment tax advantage that makes S-Corp status valuable in the first place. The right salary is a documented, defensible figure based on market rates for the services performed.
This is one of the most important intersections of payroll compliance and tax planning and it requires both to be handled together.
Some Texas cities and counties may have local obligations, but they’re not widespread. The primary state payroll tax obligation is the TWC Unemployment Insurance tax. Always verify with your local government or a CPA familiar with your specific area.
Overpayments on federal payroll taxes can be claimed as a credit on your next Form 941 or requested as a refund. TWC overpayments can be addressed through the UTS portal. The key is catching errors promptly which is why regular payroll reconciliation matters.
The IRS’s common law test looks at behavioral control, financial control, and the nature of the relationship. If you direct how, when, and where someone works and especially if they work exclusively for you they are likely an employee regardless of what the contract says.
Quarterly wage reports and UI taxes are due by the last day of the month following the end of each quarter: April 30, July 31, October 31, and January 31.
Payroll tax compliance isn’t a once-a-year exercise. It’s a consistent, ongoing obligation that touches every employee, every pay period, every quarter. When it’s handled correctly, it runs quietly in the background. When it isn’t, the consequences penalties, back taxes, audit exposure arrive loudly and expensively.
At Riley & Company, we help Houston business owners get payroll right from the start and stay current as their workforce grows. From TWC registration and deposit schedule management to year-end W-2 and 1099 filing, our team handles the details so you can focus on running your business.
Contact Riley & Company today and let’s make sure your payroll is as solid as everything else you’ve built.
You don’t need to predict the future. You just need to prepare for it.
With smart cash management, thoughtful tax strategy, and the right advisory partner, you can turn uncertainty into opportunity.
