What Taxes Does an LLC Pay in Texas?

A Limited Liability Company (LLC) is a popular business structure that combines the liability protection of a corporation with the operational flexibility of a partnership or sole proprietorship. An LLC’s tax obligations are determined by decisions made at the federal level and specific requirements imposed by the state. This overview will clarify the various taxes a Texas LLC may be required to pay.

Federal Income Tax Obligations

The Internal Revenue Service (IRS) does not have a separate tax classification for LLCs, instead using a “pass-through taxation” model based on the number of members. This means profits and losses pass through to the members, who report them on their personal tax returns. This structure avoids the double taxation associated with C corporations.

A single-member LLC (SMLLC) is a “disregarded entity,” and the owner reports all business income and expenses on Schedule C (Form 1040) with their personal return. A multi-member LLC is treated as a partnership, filing an informational Form 1065 with the IRS. The LLC then provides each member a Schedule K-1 detailing their share of profits and losses.

LLC members must also pay self-employment tax on their net earnings. This tax covers Social Security and Medicare contributions at a rate of 15.3%. This is composed of 12.4% for Social Security on earnings up to an annual limit and 2.9% for Medicare with no income cap. Members calculate and pay this tax using Schedule SE with their Form 1040.

Federal Tax Classification Elections

An LLC can elect to change how it is taxed by the federal government. This alters its tax treatment without changing its legal structure as an LLC and can offer strategic advantages depending on the business’s profitability.

One option is the S Corporation (S Corp) election, made by filing Form 2553. When taxed as an S Corp, owners who work in the business must be paid a “reasonable salary” subject to payroll taxes. The remaining profits can be distributed as dividends, which are not subject to self-employment taxes, potentially resulting in tax savings.

An LLC can also elect to be taxed as a C Corporation (C Corp) by filing Form 8832. Under this structure, the LLC pays corporate income tax at the entity level. When profits are distributed to owners as dividends, they are taxed again on personal returns, a process known as “double taxation.” This election is less common for smaller LLCs but can be advantageous for businesses that reinvest significant profits.

Texas State-Level Business Taxes

While Texas lacks a state personal or corporate income tax, it imposes a Franchise Tax on most business entities, including LLCs. This tax is calculated on a business’s “margin,” its total revenue minus certain deductions. Businesses with total annualized revenue below a high threshold do not owe any franchise tax.

Even if an LLC falls below the revenue threshold and owes no tax, it still has a filing requirement. For report years 2024 and onward, the “No Tax Due Report” is eliminated. Instead, these entities must annually file either a Public Information Report (Form 05-102) or an Ownership Information Report (Form 05-167) with the Texas Comptroller of Public Accounts.

LLCs that sell taxable goods or provide certain taxable services must collect Texas Sales and Use Tax. These businesses must obtain a Texas Sales and Use Tax Permit from the Comptroller; there is no fee for the permit, but a security bond may be required. The LLC is responsible for collecting sales tax from customers and remitting it to the state. The statewide rate is 6.25%, but local taxes can result in higher combined rates.

Employment-Related Taxes

If an LLC hires employees, it becomes responsible for payroll tax obligations at both the federal and state levels, beginning as soon as wages are paid.

Federally, the LLC must withhold income tax from employee paychecks based on Form W-4. The LLC must also withhold the employee’s share of FICA taxes (Social Security and Medicare) and pay a matching employer share. Additionally, the business pays Federal Unemployment Tax (FUTA) of 6% on the first $7,000 of each employee’s annual wages, though credits for state taxes paid can reduce this rate.

At the state level, Texas employers pay State Unemployment Tax (SUTA) to the Texas Workforce Commission (TWC) on the first $9,000 of wages per employee. New employers are assigned an initial rate, often 2.7% or the industry average, whichever is higher. Over time, the TWC assigns an experience rating that adjusts the SUTA rate based on the company’s unemployment claims history.