Texas Corporate Income Tax: Everything You Need to Know
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.3 min read
Updated July 8, 2020:
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.
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.
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 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.
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.
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.
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.
Most Common Businesses in Texas
- S Corporations
- Limited Liability Companies (LLC)
- Partnerships and Sole Proprietorships
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