Navigating the tax landscape can be one of the most daunting aspects of owning a business. If you’re a Texas entrepreneur, you’re in luck in some areas—but there are still critical nuances to be aware of. This guide demystifies business taxes in Texas, helping owners avoid pitfalls and stay compliant before tax season.
Why Texas Is Unique in Business Taxation
Texas is considered one of the most business-friendly states in the U.S., primarily because it doesn’t impose a state income tax on individuals or corporations. However, that doesn’t mean businesses are off the hook entirely. Instead, the state levies a franchise tax, which functions as a form of business income tax.
Understanding how this tax works—and how it applies to your business—is crucial for any company operating in the Lone Star State.
The Texas Franchise Tax Explained
What Is It?
The Texas franchise tax is a privilege tax imposed on each taxable entity formed or organized in Texas or doing business in the state. It’s calculated based on a company’s margin, not its profits, which makes it somewhat unique compared to other states.
Who Must File?
Entities subject to the franchise tax include:
- Corporations
- Limited liability companies (LLCs)
- Partnerships (excluding sole proprietorships and certain general partnerships)
- Professional associations
- Business trusts
If your business earns more than the no-tax-due threshold (which changes annually), you are required to file and possibly pay franchise tax.
Tax Rates and Thresholds
As of 2025:
- The no-tax-due threshold is $2.47 million in annualized total revenue.
- Taxable entities earning below this threshold must still file a “No Tax Due” report.
- Entities earning above this threshold pay:
- 0.375% for retail or wholesale businesses
- 0.75% for all other businesses
Optional EZ Computation is available for entities with revenue of $20 million or less. It uses a flat 0.331% rate and simplified calculations.
Key Filing Requirements and Deadlines
Important Forms
The main forms include:
- Franchise Tax Report (varies based on entity type and income)
- Public Information Report (PIR) or Ownership Information Report (for LLCs)
Filing Deadline
The annual deadline for filing franchise taxes is May 15. Extensions are available but must be requested through timely submissions and partial payment.
Sales and Use Tax Obligations
Besides the franchise tax, many Texas businesses must also collect and remit sales and use tax.
Sales Tax Overview
The state imposes a 6.25% sales tax, and local jurisdictions can tack on up to 2%, making the total rate as high as 8.25%. Businesses selling taxable goods or services are required to:
- Register for a Texas Sales and Use Tax Permit
- Collect tax at the point of sale
- File regular returns (monthly, quarterly, or annually based on revenue)
Exemptions
Some products and services are exempt. Common examples include:
- Certain manufacturing equipment
- Some groceries and medical supplies
- Resale items
Failure to understand these exemptions can lead to overpayment or legal trouble.
Payroll Taxes in Texas
Though Texas doesn’t have a state income tax, employers must still handle payroll taxes correctly.
Key Employer Responsibilities
Texas employers must:
- Withhold federal income taxes and FICA (Social Security and Medicare)
- Pay Federal Unemployment Tax Act (FUTA) taxes
- Pay Texas Unemployment Tax (TUTA)
Texas Workforce Commission (TWC)
Businesses must register with the TWC to manage unemployment insurance taxes. The TUTA rate varies by employer history but typically ranges from 0.31% to 6.31% on the first $9,000 of an employee’s wages.
Common Pitfalls to Avoid
Understanding business taxes in Texas is only part of the equation. Business owners must also avoid common mistakes that can lead to penalties or audits.
1. Missing Deadlines
Even if you owe no tax, failing to file on time can result in steep penalties. Always file by May 15 or request an extension.
2. Misclassifying Workers
Treating employees as independent contractors to avoid payroll taxes can backfire. Misclassification is a red flag for auditors.
3. Not Keeping Up with Threshold Changes
The no-tax-due threshold and tax rates can change annually. Monitor updates from the Texas Comptroller of Public Accounts.
4. Neglecting Local Taxes
Cities, counties, and special districts may impose taxes or business license fees. Always verify local requirements.
How to Stay Compliant
Consult a Tax Professional
Even with simplified taxes, every business is different. Working with a CPA familiar with Texas laws ensures accuracy.
Keep Detailed Records
Accurate, well-organized books are your best defense in an audit and make filing much easier.
Use Accounting Software
Modern tools like QuickBooks, Xero, and Wave offer Texas-specific tax settings and reporting features.
What If You’re an Out-of-State Business?
Doing business in Texas without being physically located there? You may still owe taxes.
Nexus Rules
Texas defines nexus as having sufficient physical or economic presence in the state. Examples include:
- Employing a Texas-based salesperson
- Selling over $500,000 in annual gross receipts in Texas
If nexus is established, you must file and pay franchise taxes and possibly collect sales tax.
Resources for Texas Business Owners
- Texas Comptroller’s Website: Offers up-to-date forms, filing portals, and calculators.
- Small Business Assistance: The Comptroller’s office provides educational outreach and webinars.
- Local Chambers of Commerce: Useful for understanding municipal tax requirements.
Don’t Wait Until It’s Too Late
Understanding business taxes in Texas doesn’t have to be intimidating. With the right preparation, systems, and support, filing becomes a routine (and manageable) part of your operations.
By taking the time to understand what’s expected, staying current with changing thresholds and regulations, and avoiding common pitfalls, Texas business owners can keep their operations running smoothly—and save themselves time, money, and stress.
