Texas Business Taxes Explained for New Owners

Starting a business in Texas comes with a significant tax advantage: Texas has no state income tax. This alone makes Texas one of the most tax-friendly states for entrepreneurs. But "no income tax" doesn't mean you're tax-free. You still have franchise tax obligations, sales tax compliance, and federal requirements. Here's what you actually need to know.

The Texas Advantage: No State Income Tax

Let's start with the biggest win. Texas does not levy a corporate income tax or personal income tax. That means:

• Your LLC's profits are not taxed by the state.
• Your corporation's earnings are not taxed by the state.
• If you're a sole proprietor, your business income faces no state tax.

This is one of the largest competitive advantages Texas offers. You're not paying a dime to the state based on what you earn, which puts more money back into your business and your pocket.

However: You still owe federal income tax to the IRS. And if your business operates in other states, those states may tax your income. But within Texas? No state income tax, period.

The Texas Franchise Tax: What It Is and Who Pays It

Since Texas doesn't tax income, it replaced that revenue stream with a franchise tax, a privilege tax on businesses operating in the state. This is where many business owners get confused. Here's the straight story:

Who Pays the Franchise Tax?

Any domestic LLC or corporation organized in Texas, or any foreign LLC or corporation registered to do business in Texas, must file an annual franchise tax report with the Texas Comptroller of Public Accounts.

There are limited exceptions: nonprofits, certain financial institutions, and sole proprietors (who operate as individuals, not entities) typically don't file franchise tax reports.

The No-Tax Threshold

Here's the relief: if your total revenue doesn't exceed $2,650,000 (for the 2026 and 2027 report years), you owe no franchise tax. You still must file a Public Information Report, but it's free and carries zero tax liability.

This means most small businesses pay no franchise tax at all, they just file the paperwork to stay compliant.

Tax Rates for Larger Businesses

If your revenue exceeds $2,650,000, you pay franchise tax at one of these rates:

• Retail and wholesale businesses: 0.375% of total revenue
• All other businesses: 0.75% of total revenue
• EZ Computation option: 0.331% for entities with less than $20 million in total revenue (an alternative calculation method that may be lower)

Example: A $5 million software consulting firm (not retail/wholesale) would pay approximately $37,500 annually in franchise tax at the 0.75% rate.

Filing Deadline

Your franchise tax report is due to the Texas Comptroller of Public Accounts by May 15 of each year. File online at comptroller.texas.gov. Missing this deadline incurs penalties and interest, don't skip it.

Sales Tax: Texas's Other Business Tax

If your business sells tangible goods or certain services to customers in Texas, you must collect and remit sales tax. Texas's state sales tax rate is 6.25%, but most counties add a local tax, bringing the total to 7.25% to 8.25% depending on location.

Getting a Sales Tax Permit

You'll need a Texas sales and use tax permit from the Comptroller. The good news: it's free and usually takes two to three weeks to process online. Apply at comptroller.texas.gov/taxes/permit.

Collecting and Remitting Sales Tax

Once you have the permit:

• Collect sales tax from your customers at the rate applicable to your location.
• Keep detailed records of sales and tax collected.
• File sales tax returns monthly, quarterly, or annually depending on your volume (typically monthly for higher-volume businesses).
• Remit the tax collected to the Comptroller.

You don't keep this money, it belongs to the state and local taxing units. Failing to remit creates serious legal and financial liability.

Exemptions and Special Cases

Not all businesses collect sales tax. Service-only businesses (consulting, accounting, legal services) typically don't. Resellers may be exempt if they hold a resale certificate. Some items are tax-exempt (groceries, prescription medications, agricultural equipment). If you're unsure whether your offerings are taxable, the Comptroller's website has detailed guidance, or consult a tax professional.

How Business Structure Affects Your Taxes

LLC: By default, a single-member LLC is taxed as a sole proprietorship (you report business income on your personal tax return). A multi-member LLC is taxed as a partnership (each member reports their share). However, you can elect to be taxed as a corporation if that's more favorable. Franchise tax applies if you're organized in Texas.

Corporation: Corporations face double taxation at the federal level (the corporation pays federal income tax, then shareholders pay tax on dividends). However, you can elect S-corp status to avoid this. Franchise tax still applies to Texas corporations.

Sole Proprietor (No LLC/Corp): You report all business income on your personal tax return and pay federal self-employment tax. No state franchise tax applies, and no filing with the Texas Secretary of State is required. However, you have no personal liability protection.

Partnership or LP: Partners report their share of income on personal returns. Franchise tax applies to registered Texas entities.

The right structure depends on your liability risk, growth plans, and tax situation. Consult a qualified tax professional or attorney before deciding.

Federal Taxes You Still Owe

Remember: Texas's lack of state income tax does not eliminate federal obligations. You still owe:

• Federal income tax on business profits (via corporate tax or personal return).
• Self-employment tax (15.3% combined Social Security and Medicare) if you're self-employed.
• Payroll taxes (withholding and employer portions of Social Security and Medicare) if you have employees.
• Estimated quarterly taxes if your tax liability is high enough.
• Federal excise tax on certain products or services.

These are federal, not state, obligations, but they're mandatory regardless of Texas's tax-friendly status.

Tax Deadlines and Filings Calendar

• May 15: Franchise tax report due to Texas Comptroller (for all LLCs and corporations).
• Monthly/Quarterly/Annually: Sales tax returns and remittance (frequency depends on your business volume).
• April 15: Federal business tax return due (1040 Schedule C for sole prop, Form 1065 for partnerships, Form 1120/1120-S for corporations).
• Quarterly: Federal estimated tax payments (if self-employed or owning a pass-through entity).
• January 31: W-2 and 1099 filings if you have employees or contractors.

Common Tax Mistakes to Avoid

• Forgetting the franchise tax report: Even if you owe no tax, filing the Public Information Report is required. Missing the May 15 deadline costs penalties.
• Mixing personal and business finances: Keep them completely separate. The IRS scrutinizes businesses that blur this line.
• Not keeping records: You need receipts, invoices, and documentation to support deductions and prove sales for sales tax purposes.
• Misclassifying workers: Treating employees as contractors can trigger IRS penalties. Know the distinction.
• Assuming you don't need sales tax: If you sell physical goods or taxable services, you almost certainly need a permit. Underpaying sales tax creates back-tax liability.

Where to Get Help

Texas business taxes are manageable if you understand the rules, but professional guidance is worth the investment:

• Texas Comptroller of Public Accounts: comptroller.texas.gov/taxes, franchise tax, sales tax, and payment information.
• Texas Secretary of State: sos.state.tx.us, business entity formation and filings.
• Texas SBDC (Small Business Development Center): sbdctexas.org, free business advising and tax planning resources.
• A CPA or tax attorney: For personalized strategy based on your specific business structure and income level.

Important Disclaimer

This content is informational only and does not constitute legal or tax advice. Texas tax law is complex and varies based on your business structure, industry, and revenue. The tax rates, thresholds, and deadlines outlined here are current as of 2026 but may change. Before making any tax-related decisions, consult a qualified tax professional, CPA, or attorney licensed in Texas. They can review your specific situation and ensure full compliance with state and federal requirements.

Key Takeaway

Texas's lack of income tax is a genuine competitive advantage for new business owners. But that advantage only pays off if you stay compliant with franchise tax filing, sales tax collection, and federal obligations. Know your deadlines, keep good records, and get professional help when you need it. That's how you keep more money in your business and stay out of trouble with the taxing authorities.