Key Takeaways

  • Texas has no corporate or personal state income tax, making it attractive for businesses.
  • The main state-level tax is the franchise tax, applicable to most entities except sole proprietorships and some general partnerships.
  • Businesses may also be responsible for sales and use taxes, property taxes, and local taxes.
  • The no-tax-due threshold exempts many small businesses from paying franchise tax.
  • Texas businesses must comply with both federal and state tax requirements, including unemployment and employment tax filings.

Texas corporate income tax is extremely low compared to other states, and there is no personal income tax. The low tax rate can drop to zero if the criteria for a specified revenue amount is not reached.

Information About Paying Federal Taxes

Depending on the form of business you choose to operate will determine the taxes you pay and how you will pay them. Below are the types of income taxes you may encounter as a business owner. Each state and locality operate under its own tax laws.

Income Tax 

All business structures, with the exception of a partnership that files an informational return, must file an income tax annually. 

A good way to look at federal income tax is as a pay-as-you-go tax. As you receive or earn income during the year, you must pay the taxes on that income.

The general way an employee pays is by having income tax withheld from their pay. If taxes are not paid through withholding, or not enough tax was withheld, you may be required to pay estimated taxes.

If estimated taxes are not required, paying any tax due can be done at the time of filing a federal income tax return.

Estimated Tax

Generally, taxes must be paid on income, which includes self-employment tax, by making regularly scheduled payments of your estimated tax during the year. 

Self-Employment Tax

Self-employment tax is for individuals working for themselves and covers Medicare and Social Security taxes. SE taxes contribute to a person's coverage under the Social Security system.

Employment Taxes

If your corporation has employees, as an employer you have certain tax responsibilities related to employment that must have forms filed and taxes paid. Employment taxes include Federal income tax withholding, Social Security and Medicare, and Federal unemployment (FUTA) tax. 

Excise Tax

An excise tax is paid if your business uses various types of facilities, equipment, or products, receives payment for certain services, operates certain kinds of businesses, or manufactures or sells certain products.

Texas Tax Obligations

Small businesses have two common taxes — employment and sales tax. Texas does not impose an income tax on corporations, nor does it impose an individual state income tax. 

Texas does have a corporate franchise tax based on earned surplus. The tax factors the greater of 4.5 percent of the corporation's earned surplus under a single-factor test of the gross receipts or 0.25 percent of taxable capital.

Sales and Use Tax in Texas

Texas imposes a state sales and use tax on the retail sale, lease, or rental of most goods, as well as taxable services. The base state rate is 6.25%, but local jurisdictions (cities, counties, transit authorities, and special-purpose districts) can impose additional sales tax up to 2%, for a combined maximum of 8.25%.

Businesses that sell taxable items must obtain a Texas Sales and Use Tax Permit from the Texas Comptroller’s office and collect sales tax from customers at the point of sale. Use tax applies to items purchased outside of Texas for use within the state when sales tax wasn’t paid at the time of purchase.

Filing frequency for sales tax depends on the volume of sales and may be monthly, quarterly, or annually. Late filing or payment may result in penalties and interest.

Employment Taxes

As a business owner with employees, you are responsible for paying certain state taxes. These include unemployment insurance taxes and workers' compensation insurance. 

Texas State Unemployment Taxes

Employers are required by law to participate in the Texas state unemployment tax program. Employee wages must be reported, and the unemployment tax paid per the Texas Unemployment Tax Act (TUCA).

Registering an Unemployment Tax Account

A business owner must register with the Texas Workforce Commission. Registration should be within 10 days of paying wages to an employee. By paying wages, the business is responsible for unemployment tax under TUCA. Once registered, you will receive a Texas Workforce Commission tax account number. 

Reporting New Hires

Within 20 days of an effective hire date, employers must contact operations center for employer new hires about rehires or new hires. The ENHR center is in the Texas office of the Attorney General.

Texas Franchise Tax

  • Texas calls its business tax a franchise tax.
  • Most businesses in the state are taxed at the rate of one percent.
  • Some small businesses will have a tax rate lower than one percent.
  • Business types in Texas are subject to the franchise tax with the exception of sole proprietorships and some general partnerships.
  • Limited liability partnerships, limited liability companies, corporations, and S corporations pay the Texas franchise tax.
  • Wholesale and retail companies pay only 0.5 percent franchise tax.
  • Businesses with less than $10 million in annual revenue filing an E-Z Computation form pay a franchise tax of 0.575 percent.
  • Businesses with less than $1.08 million in annual revenue do not own any franchise tax. This is called the no-tax-due threshold in Texas.

No-Tax-Due Threshold and E-Z Computation

The franchise tax does not apply to businesses with annualized total revenue below the no-tax-due threshold, which is $1.08 million as of the current tax year. These entities must still file a No Tax Due Report, Public Information Report (PIR), or Ownership Information Report (OIR), depending on their entity type.

Businesses with revenues under $20 million may elect to use the E-Z Computation method. This simplifies the calculation and uses a 0.331% tax rate. However, businesses using this method are not eligible for certain deductions and credits.

Most Common Businesses in Texas

  • Corporations
  • S Corporations
  • Limited Liability Companies (LLC)
  • Partnerships and Sole Proprietorships

Additional Texas Business Tax Considerations

While Texas lacks a corporate income tax, other taxes may apply depending on the nature and structure of the business:

  • Property Tax: Texas businesses are required to pay property taxes on tangible personal property used for business purposes, such as equipment and furniture. These taxes are assessed and collected at the local level by counties and municipalities.
  • Mixed Beverage Tax: Businesses that sell alcoholic beverages for on-premises consumption may be subject to mixed beverage gross receipts and sales taxes.
  • Insurance Tax: Insurance companies conducting business in Texas may be liable for premium and maintenance taxes.
  • Hotel Occupancy Tax: Businesses in the hospitality industry that rent out rooms for fewer than 30 consecutive days must collect and remit this tax.

Proper classification of your business activities and regular review of tax obligations can help avoid compliance issues. It's advisable to consult a qualified Texas tax professional or attorney for personalized guidance.

Frequently Asked Questions

1. What is the no-tax-due threshold for Texas franchise tax? Businesses with less than $1.08 million in annualized total revenue are not required to pay the Texas franchise tax but must still file the appropriate report.

2. Do sole proprietors in Texas have to pay business taxes? Sole proprietors are exempt from the franchise tax but must pay self-employment tax at the federal level and may be responsible for sales tax or property tax depending on their business activities.

3. How do I register to collect sales tax in Texas? You must apply for a Sales and Use Tax Permit through the Texas Comptroller of Public Accounts. There is no fee for this permit.

4. Are LLCs required to pay Texas franchise tax? Yes, most LLCs are subject to the franchise tax unless they are exempt entities or their total revenue falls below the no-tax-due threshold.

5. What taxes do employers in Texas need to file? Employers must file federal employment taxes (such as FUTA), Texas unemployment taxes with the TWC, and report new hires to the Texas Attorney General’s Office.

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