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Texas Business Tax – Complete Guide

Once you start a new business in Texas there are several aspects to consider including making the business operational and keeping it active. Taxes are an integral aspect of every business and filing returns on time keeps a business on the good books with the office of the Secretary of State. There are federal taxes including income tax and then there is the state tax. State taxes can vary from one state to another like some states have franchise tax while others don’t. Texas also has different types of taxes for small businesses and this guide has been created to inform you about Texas business tax. The guide also provides an insight into how different businesses are taxed like Texas LLC taxes or corporate taxes.

Texas Business Tax

It is easy to register a new business but there are several Texas state requirements that a business has to fulfill in order to enjoy active status. One such requirement is filing of Texas business tax. Along with Florida, Washington, and Nevada; Texas is one of nine states where there is no personal income tax. The most common forms of taxes in the state are the sales tax and franchise tax and then there are business specific taxes including Texas corporation taxes. It is important to note that you need to have an Employer Identification Number (EIN) as a business and Social Security Number (SSN) as a sole proprietor to file taxes in Texas.

What taxes do businesses pay in Texas?

The truth is that no one wants to file annual tax returns but if you form a business in any state including Texas, you may have to file certain taxes. On a better note, entrepreneurs favor Texas to form their new businesses because it is a highly tax friendly state. This is more so, because the state does not have any personal Texas business tax or income tax. The state and local tax burden as a percentage of state income in Texas is 8.0% as compared to some of the other states like Indiana at 8.6%, Wisconsin at 9.4%, and Ohio at 9.2%. At the same time, there are business specific taxes like Texas LLC taxes and business activity specific taxes like the sales tax that a company may be required to file.

Franchise tax

Franchise tax is not imposed by the federal government as it is a state tax. The Texas franchise tax is different from other states that impose these taxes. The rule is that any taxable entity conducting its business in Texas is required to register with the state including limited liability companies including series LLCs, partnerships, S corporations, professional corporations, and professional associations among others are liable to pay a franchise tax. It is also important to note that sole proprietorships except for single-member LLCs are not required to file franchise taxes.

Texas business tax is also known as the franchise tax and the primary difference between the traditional corporate income tax and franchise tax is that in the former, the taxes are applicable on the profit while in franchise taxes that is not the case. The Texas business tax calculator for franchise taxes is based on computation of a taxable entity’s margin. There are four ways by which it is computed and they are:

  • Total revenue minus the cost of goods sold (COGS)
  • Total revenue times 70 percent
  • Total revenue minus $1 million effective from Jan 1, 2014
  • Total revenue minus the compensation

There are no minimum Texas franchise tax requirements in the state and any entity having an annualized total revenue of less than or equal to $1,180,000 will not be required to file taxes. This is also known as the “The Zero-Tax Threshold”.

You can use a Texas business tax Calculator to compute your franchise tax or based on the tax rates like the rate for retail and wholesale companies is 0.375%. The Texas franchise tax report forms also known as the “EZ Computation Report” is used for filing this tax. It has to be filed with the office of the Texas Comptroller of Public Accounts (CPA). You can also file it electronically using the webfile systems.

Texas income tax

Texas has no state income tax or in other words, the Texas Constitution disallows any personal income tax (there is no income tax code). Instead, Texas relies on other forms of taxes like collecting sales and use tax as well as property tax. There are certain forms of taxes applicable only for business owners and their companies. All business structures except partnerships, which have to file an informational return, must file a Texas business tax annually. Some forms of income taxes filed in Texas are:

  • Self-Employment Tax – This type of income tax is applicable for those individuals who are working for themselves like freelancers. This tax covers Social Security and Medicare taxes.
  • Estimated Tax – This type of tax is filed on the income and includes self-employment tax. This is a type of Texas LLC taxes or corporation taxes.
  • Employment Taxes – This is an integral part of Texas corporation taxes if a corporation has employees. Employment tax includes Social Security and Medicare, Federal income tax withholding, and Federal unemployment (FUTA) tax.
  • Excise Tax – This is a form of Texas business tax applicable on those entities that use different types of equipment and facilities. This is also applicable for businesses that receive income through facilitation of certain services, and manufactures or sells specific types of products.

Texas sales tax

One of the most important types of Texas business tax is the sales tax although it is also referred to as the sales and use tax. This tax is applicable if a business sells taxable goods or services in the state. There is a state sales or use tax as well as a local sales or use tax. A business while transacting in the state has to collect 6.25% state sales or use tax.

If a business based out of Texas ships or delivers goods to their customers then such a business is required to collect local sales tax or use tax, or both. The local Texas business tax due should not be more than 2% and the maximum a business can collect 8.25 percent.

A business has to report their state as well as local sales and use taxes on the Texas Sales and Use Tax Return. In order to calculate the tax, businesses can use Texas business tax Calculator or the Comptroller’s online Sales Tax Rate Locator. The sales or use tax has to be filed with the Texas Comptroller of Public Accounts (CPA) and you can also file it electronically using the webfile systems.

How are Texas Businesses taxed?

If you form a new business in Texas then the tax status of the type of entity you form is an important area to consider. Different types of entities will be taxed differently and the type of tax may also vary. Some businesses may be required to file Texas franchise tax as well as sales or use tax while others may need to file property taxes as well. Let’s look at the different types of entities and their taxations.

Texas LLC Taxes

Since LLC is considered to be a pass-through entity just like an S corporation, they are not liable to pay federal Texas LLC taxes by default and instead members have to file personal tax returns. The income earned from the business gets distributed amongst the existing members of the LLC and hence each member is required to file Texas business tax calculated on the amount they have received from the business.

Texas franchise tax is a type of tax that is applicable for most LLCs operating in the state. This tax return has to be filed with the Texas Comptroller of Public Accounts (CPA). The franchise tax is one of the Texas LLC taxes that are calculated based on the “net surplus” or the net assets minus the contribution of its members’. If no franchise tax is due then an LLC is required to file the “No Tax Due Information Report”.

If a Texas limited liability company has employees then they will be required to file State Employer Taxes. This is another form of Texas LLC taxes that has to be filed with the Texas Workforce Commission (TWC). Last but not the least, if an LLC is selling goods in the state then it will be required to collect and pay sales tax or use tax. This type of Texas business tax is filed with the Comptroller of Public Accounts.

Taxes of a Texas C Corporation

A C corporation is also known as a traditional corporation and it is subjected to a standard business tax or the Texas franchise tax. The franchise tax is based on the revenue generated by the corporation annually.

Example: If you formed a Texas corporation and the total revenue generated in 2021 is $500,000 then it is less than the threshold of $1,130,000. Hence, your corporation will not be required to file any Texas corporation taxes or franchise taxes.

A C corporation in Texas will also be required to file Texas corporation taxes each year using Form 1120-U.S. Corporation Income Tax Return. If a shareholder receives a dividend from the said corporation then they will be required to pay income tax on that dividend.

Taxes filed by Texas S Corporation

An S corporation is also known as S subchapter and it is a legal business entity. In fact, S Corporations are popular designations and existing Texas LLC or C Corporations often opt to be taxed under Subchapter S of the Internal Revenue Code (IRS). Since, it is a pass through entity; the business is not subjected to Texas corporation taxes. However, you will be required to file Texas franchise tax based on the annual revenue generated by the business. Individual shareholders are not subjected to state taxes on their income.

If you have formed an S Corporation in Texas and if you are selling taxable goods or services then the S Corporation will be required to collect state sales or use tax along with local sales or use tax.

Texas Taxes for Sole Proprietorship

A sole proprietorship business also known as a sole trader is an unincorporated business with a single owner. A sole proprietor is required to report all business income and losses through their personal income tax return. This basically means that a sole proprietorship business is not taxed separately but the owner will be taxed on all the profits earned by the business, which is total income minus expenses. Sole proprietors in Texas are also required to make contributions towards Medicare and the Social Security systems and these contributions are classified under Texas business tax as “self-employment taxes”.

Texas Partnership and Taxes

There are different types of partnerships like limited partnerships (LPs), general partnerships, and limited liability partnerships (LLPs). If you start a partnership business in Texas then it will be subjected to Texas franchise tax. The exception to this tax is applicable for general partnership businesses that are solely and directly owned by natural persons. Whatever type of partnership you form; individual partners will not be subjected to state tax on any income distributed amongst partners.

Ready to Incorporate your Texas Company?

Whether you are planning to form a limited liability company (LLC), traditional corporation, or an S Corporation in Texas, the new business formation process can be quite extensive, and time consuming. This is where IncParadise comes in. We can provide your business with meaningful assistance as we are an expert incorporation service provider in Texas and can help to register your LLC or corporation in Texas.

Once you have formed a new business there are several annual and periodic Texas state requirements that you will be required to fulfill in order to enjoy active status. Our registered agent services for new and existing businesses will not only assist with new business formation but also receive legal and official documents on your behalf. IncParadise also offers several additional services like Texas domestication, foreign qualification, and filing DBA among others.

Do you want to Form your company in Texas?