Texas Independent Contractor Tax Requirements

An independent contractor is a self-employed individual who provides services to the public. This classification means the payer has the right to direct the result of the work, but not the methods for accomplishing it. As an independent contractor, you operate your own business, which carries a unique set of tax responsibilities. This guide provides an overview of the federal and Texas-specific tax obligations for independent contractors.

Federal Tax Obligations for Independent Contractors

As an independent contractor, you are responsible for two primary federal taxes: self-employment tax and federal income tax. These are paid on the net earnings from your business activities.

Self-employment tax combines Social Security and Medicare taxes. Unlike employees who split these taxes with their employer, self-employed individuals pay both portions. The tax rate is 15.3%, consisting of 12.4% for Social Security and 2.9% for Medicare. For 2025, the Social Security portion applies to the first $176,100 of earnings, while the Medicare portion has no income limit.

You must also pay federal income tax on your net business income, which is calculated using federal tax brackets. A notable deduction allows you to subtract one-half of your self-employment tax when calculating your adjusted gross income (AGI). This adjustment is meant to equalize the tax treatment between employees and self-employed individuals. This deduction lowers your taxable income, and you do not need to itemize to claim it.

Texas-Specific Tax Obligations

A primary advantage for independent contractors in Texas is the absence of a state personal income tax. This can result in considerable savings compared to operating in other states. While your earnings are still subject to federal taxes, the lack of a state income tax simplifies filing and reduces your overall tax burden.

You may, however, be subject to other business taxes depending on your activities. These taxes are separate from federal requirements and are administered by the Texas Comptroller of Public Accounts.

Texas Franchise Tax

The Texas Franchise Tax is a privilege tax imposed on taxable entities doing business in the state. As an independent contractor operating as a sole proprietorship, you are not subject to this tax. The franchise tax primarily applies to entities that provide liability protection, such as corporations, LLCs, and partnerships.

Even if you have formed an entity like an LLC, you may not owe this tax. For report years 2024 and 2025, entities with annualized total revenue at or below $2.47 million do not owe any franchise tax. Because of this high threshold, most small businesses will not have a franchise tax liability. While entities below this threshold no longer file a “No Tax Due Report,” they may still need to file an annual Public Information Report (PIR) or Ownership Information Report (OIR).

Texas Sales and Use Tax

Independent contractors in Texas must collect and remit sales tax if they sell taxable goods or provide certain taxable services. The state imposes a 6.25% sales and use tax, and local jurisdictions can add their own, with the combined rate not exceeding 8.25%.

Taxable services in Texas are specifically listed in the tax code and include activities like data processing, information services, and real property repair. If your business provides taxable goods or services, you must obtain a Texas sales tax permit from the Comptroller’s office. With a permit, you must collect the appropriate sales tax from Texas customers and remit it to the state, usually monthly or quarterly.

Calculating Your Net Business Income

To determine your tax liability, you must first calculate your net business income. The calculation involves subtracting your total allowable business expenses from your gross revenue for the year. Keeping meticulous records of your income and expenses is essential, as they are required to substantiate your deductions. The result is the profit on which you are taxed.

Gross revenue includes all income from your business activities. Clients who paid you $600 or more during the year will report this to you and the IRS on Form 1099-NEC. You are responsible for tracking and reporting all income, regardless of whether you receive this form.

From your gross revenue, you can subtract ordinary and necessary business expenses. Common deductible expenses include:

• Vehicle expenses, using either the standard mileage rate or actual costs
• Home office expenses for a space used exclusively and regularly for business
• Business supplies, software, and subscriptions
• Professional development courses or seminars
• Business-related travel, including airfare, lodging, and a portion of meal costs

How to Pay Your Taxes

For independent contractors, paying taxes involves making regular payments to the federal government throughout the year and filing an annual tax return. Any state-level taxes, such as sales tax, have their own separate payment and filing procedures established by the Texas Comptroller.

Since you do not have an employer withholding taxes, you must pay federal taxes through the estimated tax system. You will estimate your total income and self-employment tax liability for the year and pay it in four quarterly installments using Form 1040-ES. The due dates are April 15, June 15, September 15, and January 15 of the following year.

To avoid underpayment penalties, you must make these payments on time. The IRS offers several payment methods:

• IRS Direct Pay from your bank account
• The Electronic Federal Tax Payment System (EFTPS)
• Debit or credit card
• Mailing a check or money order with a Form 1040-ES voucher

At the end of the tax year, you will file your annual federal tax return using Form 1040. As an independent contractor, you will attach Schedule C, Profit or Loss from Business, to report your business income and expenses. You will also file Schedule SE, Self-Employment Tax, to calculate the taxes you owe. For Texas taxes, franchise tax reports are due annually on May 15, while sales tax returns are filed monthly or quarterly online through the Comptroller’s WebFile system.