Texas LLC Tax Filing Requirements: Everything to Know
Texas LLC tax filing requirements will vary based on how your business chooses to be taxed.3 min read
Texas LLC tax filing requirements will vary based on how your business chooses to be taxed. An LLC is what's known as a “pass-through” entity. This means all income is passed along to the LLC's members, who are required to report profits on their own federal tax returns. This differs from traditional C corporations who pay tax at the company level on its year's profits.
LLC Federal Tax Classifications
When LLCs were created, the IRS opted not to create a new tax classification to match. Instead, it allows the LLC to choose from existing classifications like a partnership, sole proprietorship, and corporation. Unless you specify differently, single-member LLCs will default to sole-proprietorship status and multi-member LLCs to partnerships. The tax flexibility is one of the reasons LLCs are so popular today.
With single-member LLCs, the IRS treats them as a disregarded entity, which means income just passes directly through to the owner. There is no separate federal tax form. The owner just reports the income on his or her own federal returns using Schedule C of IRS Form 1040. The owner pays tax at the individual tax rate but also pays 15.3 percent in self-employment taxes, which are Medicare and social security.
With multi-member LLCs, the business must file IRS Form 1065, the partnership tax return, unless it specifies a different tax method. The LLC is still not paying taxes with this return. It's more informational in nature to let the IRS know what each member's share of the profits are, which is done through a Schedule K-1. Members use the information on their Schedule K-1 to pay income tax on their share of the year's profits. They also pay taxes at the individual rate, plus the self-employment taxes. Any members who are not active (passive investors) may not be required to pay self-employment taxes.
LLCs also have the option to be taxed as a corporation. The S corporation is the more desirable option in many cases, as it reduces self-employment tax obligations. To be taxed as an S corporation, the business must meet certain requirements and file IRS Form 2553. Owners who are salaried employees of the business only have to pay self-employment tax on their salary, rather than on the profits.
To be taxed like a traditional C corporation, the LLC would file IRS Form 8832. This is not a pass-through entity. In fact, the LLC would pay tax at the business level and all members would also pay tax on their distributions or dividends. This is what is referred to as double taxation.
What to Know About Taxes for Texas LLCs
To start a Texas LLC, you need to file specific documents with the state. Here are some important reporting and state tax filing requirements to keep in mind:
- Unlike many other states, Texas doesn't require LLCs to file annual reports.
- Texas imposes a franchise tax on most LLCs, which is payable to the Texas Comptroller of Public Accounts.
- Franchise tax is based on the LLC's “net surplus,” which is the net assets minus member contributions.
- If you have employees, you need to pay Texas employer taxes.
- You need to obtain a federal employer identification number (EIN).
- Texas employers may have to pay state taxes, like unemployment insurance (UI).
- If you sell goods to Texas consumers, you'll need to collect and pay sales tax. This needs to be paid throughout the year, typically quarterly.
- If you do business in other states, you'll need to register in some or all of those states as well.
Non-Profit LLCs in Texas
A common question is whether LLCs that are set up as non-profits are exempt from paying taxes. Any Texas LLC that is a non-profit is not automatically exempt from federal or state taxes. You will need to research the requirements set forth by the IRS, specifically Publication 557: Tax-Exempt Status for Your Organization. There is no specific LLC form in Texas that denotes non-profit status. The standard form is used for general LLC creation, but it was not designed to satisfy any particular requirements set forth by the IRS or Texas Comptroller. It's important to consult with an attorney to create a non-profit or tax-exempt LLC.
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