Texas Business Tax Requirements

How Your LLC Will Be Taxed

In this guide, you'll learn about the main Texas business taxes you'll be responsible for, including sales, self-employment, payroll and federal taxes. Profits from an LLC aren’t taxed at the business level the way they are in C Corporations. Instead, they're as follows:

Items 1 and 2 fall under pass-through taxation for LLC owners, managers and members who receive profits from the business. Profits are reported on personal federal tax returns.

State Taxes for LLCs

There are two state taxes you must pay to the Texas Comptroller: sales and franchise. Depending on how your business is set up, you may also need to pay use tax.

Texas Income Tax

Texas is one of nine states that do not have income taxes.

Texas Sales Tax

If you sell physical products (such as electronics, books, cars, furniture, appliances, raw materials, etc.) or certain services, you may need to collect Texas sales tax at the point of purchase. You'll remit the taxes you collect to the Texas Comptroller.

In Texas, some items such as medication and some grocery items are exempt from sales tax. The state's Administrative Code, Title 34, Part 1, Chapter 3, Subchapter O, contains an extensive list of TX sales tax rules and exemptions applicable to numerous organizations, services and products.

The Texas sales tax rate is 6.25 percent statewide. Local taxing jurisdictions, such as cities and counties, may also impose sales tax at a rate of up to 2 percent for a total maximum combined rate of 8.25 percent.

Use our sales tax calculator to get an idea of what you'll need to pay, but always check with your accountant and the TX Comptroller to find out whether your business is required to collect sales tax and ensure you remain in compliance.

Texas Franchise Tax

Some states — including Texas — levy a tax on certain businesses for the right to exist as a legal entity and do business in the state. This is usually called a franchise tax, transaction tax or privilege tax. Despite its name, this is not a tax on franchises. It is an essential part of filing taxes for your LLC.

The Texas franchise tax rate depends on the amount of revenue your business generates and a few other factors. In fact, if your revenue is below a certain threshold, you won't owe any franchise tax at all.

However, you must still file an annual franchise tax report stating there is no tax due. Failure to do so can result in your LLC losing the right to do business in Texas and possibly having to pay a fine to reinstate it.

Texas Public Information Report

When you file your franchise tax report, you must also file a Texas Public Information Report. This document collects your LLC's information (business address, member names and titles, etc.), which the Comptroller forwards to the Secretary of State. The SOS maintains that information in the state's business records registry. This is the information you access when you perform a Texas business entity search to name your business.

You'll find all the forms you need to file and pay your TX Franchise Tax and file your TX Public Information Report on the Comptroller's website.

Talk to your accountant or tax preparer, or contact the TX Comptroller to determine whether you're required to pay the franchise tax and to ensure you're paying the correct amount.

Federal Taxes for LLCs

As the owner of an LLC, you must pay self-employment tax and federal income tax, both of which are levied as “pass-through taxation“.

Federal taxes can be complicated, so speak to your accountant or professional tax preparer to ensure that your Texas LLC is paying the correct amount.

Federal Self-Employment Tax

All members or managers who take profits out of the LLC must pay self-employment tax. This tax is administered by the Federal Insurance Contributions Act (FICA) and covers Social Security, Medicare and other benefits. The current self-employment tax rate is 15.3 percent.

You’ll be able to deduct some of your business expenses from your income when calculating how much self-employment tax you owe.

Pay Less Self-Employment Tax by Treating Your LLC As an S Corporation

The Internal Revenue Service allows an LLC to be treated as an S Corporation for tax purposes, provided your business meets certain requirements. This can help you reduce the amount of self-employment tax you pay by allowing you to declare some of your income as salary and other income as distributions or withdrawals.

You do this by filing Form 2553, also known as an S Corp Election form, with the IRS. Incfile can also file the form for you. Use our S Corp Tax Calculator to get an idea of how much money you could save with this election.

Consult with your accountant or tax advisor for more information on reducing your LLC self-employment tax through an S Corporation tax election.

Federal Income Tax

You must also pay regular federal income tax on any earnings you take out of your LLC. The amount of income tax you pay depends on your earnings, current income tax bracket, deductions and filing status.

You only pay federal income tax on profits you take out of the business, less certain deductions and allowances. This includes your tax-free amount, plus business expenses and other deductions for areas such as healthcare and some retirement plans.

Speak to your accountant for more information.

Employee and Employer Taxes

If you pay employees, there are some slightly different tax implications. Speak to your accountant to get clear guidance for your unique situation.

Employees May Need to File Tax Returns

Regardless of whether you withhold federal and state income tax, your employees may need to file their own tax returns.

Employee Insurance and Other Requirements

You may also need to pay insurance for any employees, such as employee compensation insurance or unemployment tax.

Other Taxes and Duties

Depending on your industry, you may be liable for certain other taxes and duties. For example, if you sell gasoline, you may need to pay a tax on any fuel you sell. Likewise, if you import or export goods, you may need to pay certain duties.

Speak to your accountant about any other taxes or duties you may need to withhold or pay.

Estimated Taxes

Most LLCs must pay estimated taxes throughout the year, depending on the amount of profit and income you expect to make. The most common types of estimated tax are:

Most LLCs will pay estimated taxes on a quarterly basis. Learn more on the IRS website, and speak to your accountant for more information.