LLC Taxes in Texas: Everything You Need to Know
LLC taxes in Texas are, like most of the rest of the laws governing business in the state, very favorable to companies that do business there. 3 min read
3. Texas Taxes
4. LLCs and Taxes
5. LLCs and Federal Taxes
Updated November 2, 2020:
LLC taxes in Texas are, like most of the rest of the laws governing business in the state, very favorable to companies that do business there. LLCs, or limited liability companies, are legal entities that are filed at the state level with special protections when it comes to liability. This leads to significant differences between LLCs founded in Texas and in any other state. Depending on the kind of business you are starting, Texas may just be the perfect place.
There are many reasons to do business in the Lone Star State. It is one of the most populous states in the union, and its unemployment is typically below the national average. The labor participation rate and total payroll are high. This is mainly due to low-income taxes in the state, which encourages businesses to settle there and is appealing to top talent looking for firms to work for. In Texas, the business tax is called the franchise tax. Businesses that are obligated to pay it are capped at 1% of income, which is much lower than the state income tax in many places.
An LLC is a kind of legal protection granted to companies willing to file that way on the state level. It involves changes to how the company is treated in terms of legal liability and taxation. An LLC is treated as a separate person for liability purposes, much like a corporation is, regardless of whether it is federally filed as a sole proprietorship or partnership or corporation. In most states, however, for local tax purposes, the LLC allows income to “pass-through” like a sole proprietorship would, meaning that the company's income is treated as self-employment income made by the owners instead of being subject to any corporate tax. But the LLC status is only applicable at the state level, and actually works a bit differently in Texas.
As mentioned above, Texas charges most local businesses the franchise tax, which is usually about 1% of some portion of the income of the company. This tax is leveled against LLCs, C Corporations, and S Corporations. Sole proprietorships and partnerships are immune to the tax. Moreover, many kinds of businesses, especially smaller ones, are eligible for reductions in this already low tax rate. A business making less money can file with the E-Z Computation form and only pay 0.575% as a franchise tax, though it also reduces the number of exemptions and credits the filer can take. The tax is due May 15th of every year.
LLCs and Taxes
There are some other considerations for LLCs filing their taxes in Texas. These are:
- An LLC filing in Texas that will have employees needs a federal tax identification number. Texas, however, does not have a state tax identification number system.
- Texas does not ask its LLCs to send in annual reports to the Secretary of State, instead of folding the purpose of that report into the yearly franchise tax report system.
- The franchise tax needs to be payable to the Comptroller of Public Accounts.
- Businesses based in Texas that will be doing business in other states will need to register as an LLC in those states as well if those states require it. Doing business in this sense can include having offices in the location or trying to solicit business from its residents.
LLCs and Federal Taxes
LLCs are treated federally as one of the other kinds of business entities, depending on how they are filed. An LLC owned by one person treats its income as the personal income of its owner through a process called “pass-through,” leaving the owner to pay the federal self-employment tax themselves. But an incorporated LLC instead pays a corporate tax rate on its profits and then pays taxes again on the income paid out to its shareholders. An S Corporation filing lets the income “pass-through” to the shareholders instead, but puts severe limitations on who is allowed to own stock and what forms that stock can take. This is designed to keep the business small and American.
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