How to Handle Sole Proprietorship Texas Taxes

A sole proprietorship is a business structure defined by a single individual owning and operating the business. In this arrangement, there is no legal distinction between the owner and the company, which means the owner is personally responsible for all business debts and liabilities. All profits and losses from the business flow directly to the owner, creating specific tax implications at the federal, state, and local levels that differ from corporations or partnerships.

Federal Tax Obligations for Sole Proprietors

The Internal Revenue Service (IRS) views a sole proprietorship as a “disregarded entity,” meaning the business does not file a separate tax return. Instead, all business income and expenses are reported on the owner’s personal federal income tax return, a concept known as pass-through taxation. This directly impacts the owner’s personal tax liability.

All business-related financial activities are detailed on Schedule C, “Profit or Loss from Business,” which is filed with the owner’s Form 1040. On this form, the proprietor lists gross income and subtracts the cost of goods sold and all deductible business expenses, such as office supplies and advertising. The net profit or loss from Schedule C is then carried over to the personal tax return, increasing or decreasing the owner’s total taxable income.

A federal obligation for sole proprietors is the self-employment tax, which covers Social Security and Medicare taxes. A sole proprietor is responsible for paying both the employee and employer portions. This tax is calculated on Schedule SE, “Self-Employment Tax,” on 92.35% of net business earnings. The 15.3% rate consists of a 12.4% Social Security tax, which in 2025 applies to the first $176,100 of earnings, and a 2.9% Medicare tax with no earnings limit. One-half of the self-employment tax paid can be deducted as an adjustment to income.

Because taxes are not automatically withheld from a sole proprietor’s income, they are required to make quarterly estimated tax payments to the IRS. These payments must cover both the anticipated income tax and the self-employment tax. Paying these taxes on time is necessary to avoid potential underpayment penalties.

Texas State and Local Tax Obligations

An advantage for sole proprietors in Texas is the absence of a state personal income tax. This means the net profit from the business, which passes through to the owner, is not taxed at the state level.

The primary business tax in Texas, the franchise tax, does not apply to sole proprietorships. This tax is levied on entities that have liability protection, such as corporations and LLCs, so a sole proprietorship is exempt.

The most common state tax a sole proprietor in Texas might encounter is the sales and use tax. If a business sells taxable goods or provides taxable services, it must collect this tax from customers and remit it to the Texas Comptroller of Public Accounts. The statewide rate is 6.25%, but local jurisdictions can add their own sales tax, for a combined rate up to 8.25%. Taxable services include things like data processing and nonresidential property repair.

At the local level, sole proprietors are subject to Business Personal Property (BPP) tax. This tax is administered by county appraisal districts and is levied on tangible assets used to produce income, such as office furniture, machinery, and inventory. This is separate from the property tax paid on real estate.

Information Needed for a Texas Sales Tax Permit

Before collecting sales tax on taxable goods or services, a sole proprietor must obtain a Texas Sales Tax Permit from the Comptroller of Public Accounts. The application is free and can be completed online or by mailing Form AP-201. The process typically takes two to three weeks to complete.

The application requires specific details about the business and its owner. You must provide the following:

• Your Social Security number
• The legal name of the business and any assumed name, or “Doing Business As” (DBA)
• The business’s physical address and contact information
• The North American Industry Classification System (NAICS) code for the business

A NAICS code is a six-digit number that classifies businesses by their primary economic activity. The U.S. Census Bureau website provides a tool to help find the correct code.

How to File and Pay Your Taxes

For federal estimated taxes, sole proprietors have several payment options. Payments can be made from a bank account using IRS Direct Pay, through the Electronic Federal Tax Payment System (EFTPS), or by mailing a check or money order with a Form 1040-ES payment voucher. Each voucher corresponds to a specific quarterly due date.

Filing and paying Texas sales tax is handled through the Texas Comptroller of Public Accounts’ Webfile system. After obtaining a sales tax permit, the business owner is assigned a filing frequency—monthly, quarterly, or annually—based on sales volume. Using the Webfile portal, the proprietor reports total sales, taxable sales, and the amount of tax collected, then remits the payment electronically.

Business Personal Property (BPP) tax compliance is a local process. First, the sole proprietor must submit an annual rendition form to their local county appraisal district by April 15, listing all taxable business assets owned on January 1. After the district appraises the property, it sends a tax bill, usually in October. Payment is due to the local tax assessor-collector by January 31 of the following year.