Navigating Small Business Taxes in Texas

It’s true what they say: everything is bigger in Texas. That also applies to your tax burden if you don’t understand how to navigate the Lone Star State’s unique tax laws and regulations. While Texas business taxes can seem daunting, having an expert tax professional in your corner can provide tips to survive the upcoming tax season. 

If you own a Texas business or want to learn how to start a business in Texas, use this blog as your ultimate guide to small business taxes in Texas. We break down sales tax rates, tax deadlines, franchise tax, and other integral components of tax season that you need to know to file for your small business in Texas. Following this guide will ensure you’re on top of things to keep your business running smoothly and have everything you need to file correctly, on time, and comply. 

What to Know About Small Business Taxes in Texas

Texas small business taxes differ from most states and impact various entities in various ways. Understanding the strengths and weaknesses of each will give you a better understanding of what you will be facing as you operate your small business in Texas. We’ll cover tax rate, income tax, deduction limit, thresholds, and more to help prepare your business for the upcoming tax season.   

Texas Franchise Tax

Texas charges small business taxes as franchise taxes. This tax is unique because it differs from a corporate income tax. Small businesses below a certain amount of income pay no franchise taxes, which is $1,230,000 for 2022-2023.

Franchise Tax Maximum 

Another unique aspect of the franchise tax rate is a maximum amount of 1% for all business entities in the state. The tax rate can decrease depending on the amount a small business earns.  

Texas Nexus

Nexus is essential in determining if a small business in Texas must pay a franchise tax. Businesses have a nexus if there’s a physical presence within the state. The state of Texas imposes the nexus the earliest of:

• January 1, 2019, if the entity obtained a use tax permit before that date
• The date the entity has a physical presence
• The date the entity obtains a Texas tax permit if obtained on or after January 1, 2019
• On the first day of the federal income tax accounting period, the taxable entity had gross receipts from business in Texas of $500,000 or more.

If your small business has nexus in the state of Texas, you’ll need to file two reports: 

• Franchise Tax Report: EZ Computation, Long Form, or No Tax Due form
• Information Report: Ownership Information Report or Public Information Report

Finally, business entities, owners, and shareholders won’t worry about Texas’s state income tax. Texas is one of seven states that doesn’t charge state income tax.

Texas Sales Tax

There’s a 6.25% Texas state sales and use tax on all retail sales, leases, and rentals of most goods, as well as specific services that are taxable. Local jurisdictions can add up to a 2% sales and use tax for a maximum combined rate of 8.25%.

If you run a Texas business, sell or lease tangible personal property, or sell taxable services, you must apply for a tax registration permit. Successful applicants receive their permits in 2-3 weeks. You may use it via Texas’s eSystem.

You must also collect and report your earnings, which are determined by the amount of taxes you paid in the preceding state fiscal year (Sept. 1 – Aug. 31). There are four tiers: 

• Less than $10,000
• $10,000 – $49,999
• $50,000 – $499,999
• $500,000 or more

Use this page to find the reporting and payment methods to use.

You will be notified by letter after your application for a sales tax permit has been approved whether you will file monthly or quarterly taxes. If a due date falls on a Saturday, Sunday, or legal holiday, the next working day is the due date.

Texas Business Taxes

From sales tax to payroll taxes, income tax, tax rates, deadlines, and more, businesses must understand what forms they are responsible for submitting, how they affect the business, and what deadlines are imperative to meeting. Below, you will find a breakdown of the different business taxes in Texas, including sales tax, payroll tax, C corp, S corp, LLC, partnership, and sole proprietorship. 

Texas Sales Tax

Sales tax varies state by state, all within different parameters. Texas imposes a 6.25 percent state sales and use tax on all retail sales, leases, and rentals of taxable services and most goods. Local taxing jurisdictions can also impose up to 2 percent sales and use tax for a maximum combined rate of 8.25 percent. 

Texas Payroll Taxes

Texas has no income tax, but there are other payroll taxes you are responsible for, such as the quarterly state unemployment insurance tax. Small businesses can transmit this reporting online. 

C Corp Taxes in Texas 

If your business operates as a C corp, there are a few things to remember. C corps will pay the franchise tax, and their shareholders will also pay federal taxes on their individual income.

The EZ Computation Rate and No Tax Due Threshold rates apply to C corps and all business entities. 

S Corp Taxes in Texas

If you want to know how to set up an S-Corp in Texas, you should understand the taxes they must pay. In Texas, S corps are subject to the franchise tax. An S corporation is a pass-through entity, meaning shareholders won’t pay franchise taxes individually, and they don’t pay state taxes for their share of the corporation’s income.

As long as the revenue from S corps remains within the No Tax Due threshold, an S corporation won’t pay taxes in Texas.

LLC Taxes in Texas

To know how to make an LLC in Texas, you must pay the necessary taxes. An LLC in Texas must pay a franchise tax, even though LLCs are pass-through entities. Members and owners of LLCs won’t pay state income tax for their personal income.

If you operate a single-member LLC, you must also file and pay a franchise tax.

Partnership Taxes in Texas

If you operate your small business as a partnership in Texas, the state requires you to pay a franchise tax. This includes partnerships that are limited partnerships or limited liability partnerships. 

Sole Proprietorship Taxes in Texas

There’s no requirement for sole proprietorships to file or pay franchise tax in Texas. Instead, sole proprietors will pay their individual federal income tax.

The structure of partnerships and sole proprietorships may need clarification with taxes in Texas—businesses owned by individuals that direct business income to the same individuals won’t pay the franchise tax. 

Tax Rates, Deduction Limits, and Tax Thresholds in Texas

Franchise tax rates, deduction limits, and tax thresholds vary by report year. Here is a breakdown for 2022 and 2023. 

• No Tax Due Threshold - $1,230,000
• Tax Rate - (retail or wholesale) 0.375%
• Tax Rate - (other than retail or wholesale) 0.75%
• Compensation Deduction Limit - $400,000

Tax Due Dates in Texas

One of the most vital things business owners need to know to prepare for tax season is the relevant due dates for essential reports, especially the franchise reports shown below. The Annual Franchise Tax Report and Final Franchise Report are due May 15th. If May 15 falls on a weekend or holiday, the due date will be the next business day.

• Annual Franchise Tax Report - Final Franchise Tax Reports - May 15th

Work with Texas Tax Experts for Business Tax Solutions

Texas small business taxes can be intimidating. It can also be challenging to hit tax deadlines and remain compliant, which is why so many small businesses in Texas work with 1-800Accountant, America’s leading virtual accounting firm.

An expert tax specialist can help small business owners navigate their unique challenges when filing taxes while providing insight into income tax, franchise tax, deadlines, and other frequently asked questions. Whether it’s entity formation, small business taxes, or any of our professional business services, we have the solution you need at a price that works for you. Schedule a quick consultation – usually 30 minutes or less – to learn how we can help.