How Much Is Business Tax In Texas?

Thinking about starting your business in Texas? It’s no surprise—Texas is known for its business-friendly environment and thriving economy. One of the key factors to consider as you plan your venture is the cost of doing business, including the taxes you’ll need to pay. Understanding the different types of business taxes in Texas is essential to ensure you’re fully prepared to manage your financial obligations while taking advantage of the state’s many benefits. Let’s explore the basics of business taxation in the Lone Star State.

Taxes in Texas: Overview

Texas offers a relatively favorable tax environment for small businesses due to the absence of a state income tax. However, businesses are still subject to other taxes, such as the Texas franchise tax, which applies to businesses earning above a certain threshold. This tax is calculated based on the company's revenue and ranges from 0.375% to 0.75%, depending on the type of business.

Additionally, Texas businesses face local and state sales taxes, which combined can reach up to 8.2%. Property taxes in Texas are also notable, as the state relies heavily on them due to the lack of an income tax. On average, property taxes in Texas are higher than in many other states, impacting both business and residential property owners.

Small business owners in Texas can benefit from staying informed about specific tax obligations and leveraging tax credits where possible. Due to the complexity of various tax structures, consulting with tax professional familiar with Texas's unique tax landscape is often recommended.

Texas Income Tax

Texas is one of the few states in the U.S. that does not impose a state income tax on individuals. This means residents and businesses operating in Texas do not pay any state income tax, which can be a significant financial benefit. However, to offset the lack of income tax, Texas relies on other forms of taxation, such as property taxes, which are among the highest in the country, and a state sales tax of 6.25%, which can increase up to 8.25% with local taxes included. This tax structure helps maintain the state’s revenue without burdening residents with income tax.

How Much Is Business Taxes in Texas?

In Texas, businesses do not pay a traditional income tax, but they are subject to several other taxes depending on the business type and activities. The most significant tax is the franchise tax, which applies to businesses with annual revenue exceeding $1.23 million. This tax is calculated based on the company’s taxable margin and is 0.375% for retail and wholesale businesses, and 0.75% for other types of businesses. However, businesses below the revenue threshold are exempt from paying this tax, though they must still file a report.

Additionally, businesses that sell goods or taxable services are required to collect and remit sales tax, which is 6.25% at the state level, with local jurisdictions potentially adding up to 2%, bringing the total to a maximum of 8.25%. For businesses with employees, there’s also the unemployment insurance tax, which ranges from 0.31% to 6.31% on the first $9,000 of each employee’s wages.

Tax Structure in Texas

Texas has a unique tax structure that stands out for its lack of state income taxes, both for individuals and corporations. Instead, the state primarily relies on a franchise tax, property taxes, and sales taxes to fund government services. The franchise tax applies to businesses with gross receipts over $1.23 million, with rates varying between 0.375% for retail and wholesale businesses and 0.75% for others. Additionally, Texas has a state sales tax rate of 6.25%, which can increase up to 8.25% with local taxes. Next, let’s deep dive into the different taxes that different types of corporations might face when you are planning on owning a business in Texas. 

C Corporations

C Corporations in Texas are subject to the state’s franchise tax, rather than a traditional corporate income tax. The franchise tax applies to businesses with gross receipts over $1.23 million and is calculated based on the company’s taxable margin, which can be derived from total revenue or revenue minus certain deductions. C Corporations, like all businesses in Texas, benefit from the absence of state income taxes, making Texas an attractive state for incorporation

S Corporations

S Corporations in Texas are subject to the state’s franchise tax, even though they are typically exempt from federal corporate income tax. The franchise tax applies to S Corporations with gross receipts over $1.23 million. While the business itself pays the franchise tax, the income earned by shareholders is passed through to them and is not taxed at the state level, allowing them to benefit from Texas’s lack of personal income tax

Limited Liability Companies (LLC)

Limited Liability Companies (LLCs) in Texas are subject to the state’s franchise tax, which applies to most businesses with gross receipts over $1.23 million. While LLCs are typically pass-through entities for federal tax purposes—meaning the income is taxed on the owners’ personal tax returns—they still must pay the Texas franchise tax on their taxable margin. However, LLCs benefit from Texas’s lack of state income tax, which allows members to avoid paying state tax on their individual earnings from the LLC

FAQs on Texas Business Taxes

We’ve compiled a list of the most frequently asked questions about Texas business taxes to help you navigate the complexities of doing business in the Lone Star State. Whether you’re just starting out or looking to expand, these FAQs will provide you with clear, concise answers to some of the most common concerns business owners face when it comes to taxation in Texas. Dive in to get the information you need to make informed decisions for your business.

Does Texas Have a Sales Tax?

Texas has a state sales tax of 6.25% on most goods and services, including retail sales, leases, and rentals. Additionally, local jurisdictions, such as cities and counties, can impose additional sales taxes of up to 2%, bringing the total possible sales tax rate to 8.25%. This tax structure applies to both in-state and certain out-of-state sellers, depending on their level of business activity in Texas. Sales taxes are collected by the seller at the point of sale and remitted to the state

Does Texas Have a Franchise Tax?

Texas does have a franchise tax, which is a type of privilege tax imposed on businesses operating within the state. The tax applies to most business entities with gross receipts exceeding $1.23 million. The franchise tax rate varies depending on the type of business: 0.375% for retail and wholesale businesses, and 0.75% for other businesses. Additionally, small businesses with revenues below the threshold of $1.23 million are exempt from paying this tax. The tax is calculated based on the business’s taxable margin, which can be derived using various methods depending on the entity’s financials

Does Texas Tax Business Property?

Texas does tax business property through what is known as a business-owned property tax. This tax applies to tangible owned-property used in a business, such as machinery, furniture, inventory, and equipment. Unlike real property, which includes land and buildings, business owned property is movable and used for income generation. 

How Much Should A Small Business Set Aside For Taxes In Texas?

In Texas, a small business should typically set aside 25-30% of its income for taxes. This range covers various tax obligations, including federal taxes, self-employment taxes, and state-level taxes like sales tax or franchise tax. While Texas does not impose a state income tax, businesses still need to plan for other tax liabilities such as the franchise tax if their revenue exceeds $1.23 million, as well as sales tax, which can be as high as 8.25% when local taxes are included. It’s important to regularly consult with a tax professional to determine the exact amount needed based on your specific circumstances

What Taxes Do LLCs Pay In Texas?

In Texas, LLCs are subject to a few different types of taxes, depending on their operations. The primary tax is the franchise tax, which applies to most businesses in Texas, including LLCs. If your LLC’s revenue exceeds $1.23 million annually, you’ll be required to pay this tax, which is calculated based on your taxable margin. However, if your revenue is below this threshold, you won’t owe any franchise tax, though you still need to file a report.

Additionally, if your LLC sells goods or taxable services, you’ll need to collect and remit sales tax. The state sales tax rate is 6.25%, but local jurisdictions can add up to an additional 2%, bringing the total to 8.25% in some areas. If your LLC has employees, you’ll also need to handle payroll taxes, which include federal income tax withholding, Social Security, Medicare, and unemployment taxes.

LLCs that are single-member entities are typically treated as sole proprietorships for tax purposes, meaning all profits are reported on the owner’s personal tax return. Multi-member LLCs are usually taxed as partnerships, with each member paying taxes on their share of the profits. However, LLCs have the flexibility to elect to be taxed as a C-corporation or S-corporation if that is more beneficial for their situations.

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