What Taxes Do Small Businesses Pay in Texas?

Texas is known for its business-friendly environment, largely due to the absence of a state corporate or individual income tax. This does not mean businesses operate tax-free. A variety of other state and local taxes apply, and understanding these obligations is necessary for compliance.

The Texas Franchise Tax

The primary business tax in Texas is the franchise tax, levied on most legal entities for conducting business in the state. This tax applies to corporations, limited liability companies (LLCs), S corporations, and partnerships. Sole proprietorships and certain general partnerships are not subject to the franchise tax, which is calculated based on a business’s “margin.”

For businesses with annualized total revenue at or below $2.47 million, no franchise tax is due. These businesses are no longer required to file a “No Tax Due Report.” However, most entities, even those below the threshold, must still file an annual Public Information Report (PIR) or an Ownership Information Report (OIR) to remain in good standing.

For businesses that exceed the revenue threshold, the tax must be calculated. The E-Z Computation is available to entities with annualized total revenue of $20 million or less. This method applies a tax rate of 0.331% to the portion of revenue sourced to Texas.

The alternative is the standard “long form” calculation, which requires a business to determine its margin by subtracting a deduction from total revenue. Businesses can deduct the greater of their cost of goods sold (COGS) or compensation. The tax rate applied to this margin is 0.75%, with a lower rate of 0.375% for qualifying wholesalers and retailers.

State and Local Sales and Use Tax

Businesses in Texas that sell tangible personal property or provide taxable services must collect and remit sales tax. A complementary tax, the use tax, applies to items purchased tax-free from outside Texas but are then brought into the state for use. This ensures that out-of-state purchases are taxed similarly to in-state ones.

A business’s obligation to collect these taxes is determined by “nexus,” a connection to the state. Nexus is established by having a physical location, employees, or inventory in Texas. For remote sellers, an economic nexus is created if their total revenue from sales into Texas exceeds $500,000 in the preceding 12-month period.

Before making taxable sales, a business must obtain a Texas Sales and Use Tax Permit from the Comptroller, for which there is no fee. Once registered, the business must file regular sales tax returns, with the frequency depending on sales volume.

The total sales tax rate combines the state rate with local rates. The Texas state rate is 6.25%. Local jurisdictions, like cities and counties, can add up to 2%, making the maximum combined rate 8.25%. The business is responsible for collecting the correct combined rate for each transaction.

Employment-Related Taxes

Hiring employees creates state and federal tax responsibilities. In Texas, employers must pay State Unemployment Tax (SUTA) to the Texas Workforce Commission (TWC). These funds provide benefits to eligible unemployed workers and are paid solely by the employer.

New employers are assigned a standard SUTA tax rate of 2.7% on the first $9,000 of wages paid to each employee annually. After operating for at least six quarters, a business receives an “experience rating.” This rating adjusts the tax rate based on the company’s history of unemployment claims, with rates for experienced employers ranging from 0.23% to 6.23%.

Employers must also manage federal employment taxes. This includes withholding federal income tax from paychecks based on an employee’s Form W-4. Employers are also responsible for FICA taxes, which fund Social Security and Medicare, by paying a share and withholding the employee’s portion.

Lastly, employers must pay Federal Unemployment Tax (FUTA). The standard FUTA rate is 6.0% on the first $7,000 of each employee’s wages. Employers receive a credit of up to 5.4% for paying state unemployment taxes on time, making the effective rate 0.6%.

Business Property Taxes

Texas businesses must pay local taxes on business personal property (BPP). This is not a state tax but is assessed and collected by local county appraisal districts. BPP tax is levied on the tangible assets a business owns that are not considered real estate.

Taxable BPP includes a wide range of assets used to produce income. Examples include:

• Office furniture, fixtures, machinery, and equipment
• Computers and tools
• Inventory the business holds for sale

Each year, businesses must file a “rendition” form with their local county appraisal district, listing all taxable assets as of January 1st. The filing deadline is April 15th. The appraisal district uses this form to assess the property’s value and calculate the tax owed based on local rates.

Federal Tax Obligations for Texas Businesses

All businesses in Texas are subject to federal income tax. The method of payment is dictated by the business’s legal structure.

For pass-through entities like sole proprietorships, partnerships, LLCs, and S corporations, profits are not taxed at the company level. The net income is “passed through” to the owners. They report it on their personal tax returns and the income is taxed at their individual rates.

A C corporation is a separately taxable entity that pays federal income tax on its profits by filing Form 1120. If the corporation distributes profits to shareholders as dividends, those shareholders also pay personal income tax on that income, which is known as double taxation.

Owners of unincorporated businesses, like sole proprietors and partners, also pay self-employment tax, which is their version of FICA taxes. The rate is 15.3%, which includes 12.4% for Social Security and 2.9% for Medicare.

For 2025, the Social Security portion applies to the first $176,100 of net earnings. The Medicare portion applies to all net earnings without a limit.