How to Deal with Small Business Taxes in Texas

April 14, 2021
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Texas is one of the most business-friendly states in the country. While it offers an attractive environment for small business owners, with a large population and a robust economy, there are essential things to consider.

Starting a business in Texas can be a wise decision, but there are tips to help make the process easier. Here’s how to deal with small business taxes in Texas.

What to Know About Small Business Taxes in Texas

Texas small business taxes differ from most states. First, 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. For the year 2021, the income amount is $1,180,000.

Second, the franchise tax rate is unique in that there’s a maximum amount of 1% for all business entities in the state. The rate can decrease depending on the amount a small business earns and 

Third, nexus is a crucial factor 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; or
  • The first day of the federal income tax accounting period in which the taxable entity had gross receipts from business done 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 have to worry about Texas’s state income tax. Texas is one of seven states that doesn’t charge state income tax.

Corporate Taxes in Texas

Texas is one of six states without a corporate tax. However, it taxes businesses differently than many states, as a franchise tax. This tax works as a fee that a company pays because of doing business in the state.

There are five corporate tax rates entities will pay in Texas:

  • Most businesses pay a franchise tax rate of 1%; however, many businesses pay a lower rate.
  • Small businesses earning $20 million or less in annual revenue will pay 0.331% as a franchise tax rate. (This is the EZ Computation Rate).
  • Small businesses earning between $1.18 million and $10 million will pay 0.575% as a franchise tax rate.
  • Businesses earning less than $1.18 million annually pay no franchise tax (this is the No Tax Due Threshold.)

There are other rates that small businesses will pay, depending on the items sold: 

  • If your small business is a retailer or wholesaler, you’ll pay a franchise tax rate of 0.375%. 
  • The franchise tax rate for businesses other than retail or wholesale is 0.75%.

C-Corp Taxes in Texas 

If your business operates as a C-Corp, there are a few things to keep in mind. C-Corps will pay the franchise tax. Their shareholders will also pay federal taxes on their individual earnings as well.

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

S-Corp Taxes in Texas

In Texas, S-Corps are subject to the franchise tax. In addition, S-Corps are pass-through entities. This means that individual shareholders won’t pay franchise taxes individually, and 

they also 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-Corp won’t pay taxes in the state of Texas.

LLC Taxes in Texas

If you operate your small business as an LLC in Texas, you’ll 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’ll need to file and pay a franchise tax as well. 

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. Sole proprietors will pay their individual federal income tax instead.

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

Multistate Taxes

Multistate taxes can occur if your business has locations in multiple states. If that’s the case, Texas charges franchise taxes differently. The state of Texas considers these businesses as remote sellers.

If your business operates as a remote seller, then there are some things you should know. 

Remote sellers are those that only seek sales within taxes, though their business location is out of state. 

Examples of remote sellers include businesses that solicit sales, in Texas, through:

  • Catalogs or flyers
  • Radio or television 
  • Telephone
  • The internet

Even if your business is a multistate business, you’ll pay a franchise tax for operating in Texas. The state of Texas considers any business entity from out-of-state with annual gross receipts of at least $500,000 to have an economic nexus within the state. 

Let Us Help You With Your Taxes

Whether you are starting a business in Texas, or you have multiple businesses in Texas, it’s always important to know taxes. This can save you money and time in the long run.

No matter what your business entity is, it’s important to know the small business taxes you’ll pay. Work with the pros at 1-800Accountant for help with your small business tax needs.

This post is to be used for informational purposes only and does not constitute legal, business, or tax advice. Each person should consult his or her own attorney, business advisor, or tax advisor with respect to matters referenced in this post. 1-800Accountant assumes no liability for actions taken in reliance upon the information contained herein.