The Ultimate Guide to Small Business Taxes in Texas
Texas is a fantastic place to set up shop for your small business. It has low taxation and many benefits. However, many business founders get so overwhelmed by the process of finding clients and generating revenue that they overlook the taxing period. It’s understandable—revenue is important for your longevity!
However, Texas taxes (say that several times in quick succession!) are complex yet necessary, and doing them properly will lift a large burden from your shoulders. This article covers all the nitty-gritty regarding Texas taxes and what it means for each business structure. Read on to find out everything you need to know. Let’s go!
What you should know about small business taxes in Texas
The first fact to note is that Texas doesn’t have corporate income taxes. Instead, it operates via a franchise tax. As a small business owner, this is what you will be charged. You may be wondering what the difference between these two forms of taxes is.
To put it in simple terms, corporate taxes have to do with profit (i.e., depending on how much revenue you earn, you could be charged more taxes), while franchise taxing is a fee you pay for the sheer privilege of operating in a specific state, city, or county.
If your business earns $20 million or less per year (wouldn’t that be nice!), you will pay a franchise tax of 0.331% of your business earnings. Differently, if you’re in wholesale or retail, the tax amount you pay is 0.375%, and for businesses other than this the rate is 0.75%. That said, there are other factors to consider.
For instance, whether your business has a Nexus or not is a big deal. A Nexus is a physical presence in the State, meaning a retail store or a warehouse. However, other aspects can determine this, for example, if your business has direct ties to similar businesses in Texas, such as affiliates. It’s worth being thorough so you can register your business accurately.
Small business taxes in Texas for corporations
So, if the above applies to your business, the first step is to fill out and file the E-Z Computation Form. It’s a simple, one-page form. You will need to have Adobe Reader installed on your computer to be able to use the linked form.
While this generally applies to Texas corporations, there are two different types of corporations, and it’s worth knowing what distinguishes a business that’s filed under S-corp from a business that’s filed under C-corp. In both cases, these are distinct categories where you can file your taxes with the IRS. However, both have their pros. Let’s take a look.
S Corporations often have zero corporate and self-employment taxes to pay (woo!) and have protections of incorporation such as limited liability and the ability to transfer interests. A transfer of interest is the transfer of an object of sale, a business entity that allows you to move your business elsewhere if you wish.
A limited liability (LLC) is a business entity type that allows businesses to have the tax benefits of a sole proprietorship and a corporation's liability protection. It’s the best of both worlds.
On the other hand, with an S-corp you have the costs of incorporating your business—something we all have to do when we set up a business that checks the corporation box. There are also complex compliance rules. These are worth reading up on if you’re unfamiliar with them.
The big element of this entity is that the business owners (or shareholders) are taxed separately from the business entity itself. However, you also must pay separate corporate income taxes. It’s essentially a system where you get taxed twice. First, your business, and then yourself.
That might sound like a bad deal, but C corporations are comparable to S corporations and LLCs, as both the aforementioned business structures also have their company assets separated from the owners. It’s just that C Corporations have different legal stipulations for treating taxes.
What’s so great about separating business assets from personal funds? For one, it reduces the risk of personal liability, as the business is now a separate entity from yours. You will never have personal debt from your company. Anything of that nature stays within your office walls (even if they’re virtual!) and must be dealt with by your company in time. You can leave work at work.
Small business taxes in Texas for LLCs
If you run an LLC structure in Texas, even though you’re running a flow-through entity, you’re still liable to pay the standard franchise taxes and file a public information report with the Comptroller. A flow-through entity is a system where all revenue passes through the business and onto the owners and shareholders. It means that the company’s revenue is also that of the owner.
The upshot is that you won’t pay the state income tax for your personal income. You will only be taxed once via your business.
How partnerships are taxed is a complex question because there are so many different kinds of partnerships out there. For instance, there are limited partnerships (LP) and limited liability partnerships (LLPs). In general, most partnerships have to pay the franchise tax in Texas. The only exception is the general partnership that’s owned directly and solely by the founders.
Furthermore, individual partners don’t have to pay the state tax on their income. Like the C corps, it’s all done within the company.
If you’ve read every section of this article so far, you may be shocked to learn that sole proprietors don’t pay franchise taxes in Texas. And considering how there’s no such thing as a state income tax in Texas, you’ve lucked out if you’re a sole proprietor. This means you can invest more of your profits into your business.
You’re subject to federal income taxes if you run a sole proprietorship. This is done on an individual level. You have to provide an electronic report on the earnings of the preceding year that runs from September 1st to August 31st. Just make sure you get it in on time or there’s a $50 dollar late fee.
How multistate businesses are taxed in Texas
Multistate taxes could be applied to your business if it operates in multiple locations in different states. Likewise, if your business was created in a different state but still generates significant revenue in Texas, it could be classified as having a nexus in Texas. Consequently, it’s likely required to pay taxes there.
The same is true for aspects of your business that run in other states. If they have a nexus, they’re likely to be taxed.
Taxation for multistate businesses is a complex state of affairs that can be challenging to navigate on your own. If you’re still feeling confused, Wave Advisors are certified tax experts who can help walk you through everything you need to know and set you on the right path.
How the sales and use tax works in Texas
All Texas businesses are required to pay taxes on retail sales, retail rentals, and retail services. Anything retail warrants your tax payments. That’s the nature of sales and use tax in Texas, my friends. The Texas sales and use tax rate is 6.25%; however, you’re likely to be charged an additional 2% by your local jurisdictions. This extra 2% is contingent upon your business. For instance, transit authorities are more likely to impose this if you run a transport business. That total taxation of 8.25% is still pretty low compared with other states.
Sales and use taxes apply to anything classed as retail in Texas—so any sale of goods or services that involves direct contact (whether over the phone or over the counter) with clients and/or customers. It’s a good idea to determine where your business stands with this, as all companies that receive retail sales, leases, rentals, and taxable services must maintain a sales tax permit.
This means you must collect sales taxes from your customers at the point of sale and report this to the State. When it comes to the sale of goods, it’s a simple transaction that’s taxable. With services, it’s a little trickier. This is another area where it can be helpful to chat with experts who are knowledgeable on the topic, but just to give you a sense, here are a few examples of taxable services:
- Storage services, such as parking or warehouse stocking
- Event hosting. This could apply to movies, sporting events, and music festivals
- Computer services such as data entry, coding, or word processing
- Laundry and cleaning services
- Appliance repair, such as household items
- Refurbishment (such as furniture, houses)
- Broadcasting (any distribution of satellite, radio waves, TV signals, or analog television counts as a taxable service)
Many of these examples might help you to define whether your business is a taxable service or not, but there’s usually more to it. For instance, if you run a spa which provides massages, you run a taxable service unless a licensed massage therapist performs your services. It’s a good idea to look thoroughly into each element of your business so you’re aware of any loopholes or necessities.
What is the Texas income tax?
Texas’ taxation situation is a complex beast with many moving parts, just like any other State. How it applies to you depends entirely on your company's individual level. It starts with your business entity type. Corporations have different rules than LLCs, which have different rules from sole proprietorships.
While Texas does not have an individual or corporate income tax, its income tax rates are determined by its state sales tax rate of 6.25% and the local sales tax rate of 2%.
The bottom line on small business taxes in Texas
Taxes are important, and not paying them can be disastrous (trust us, you don’t want to go there!). But if you get on the ball and get organized ahead of time, you’ll be totally prepared come tax time. To define where your business stands with taxation, start with your entity type, find out the bracket you fall under, and then look for any stipulations relevant to your business. Then it’s a case of filing your returns accurately. If you require more detailed accounts of what each specific stipulation means for you, check in with the Texas comptroller or reach out to an expert, like a Wave Advisor!
It might be a long process, but getting to know the tax requirements in your state will pay dividends in the future and save you a ton of headache. Running your own business might have different features from nine-to-five employment, but everyone still has to pay taxes. After you’re all up to speed with your taxes, you can put your focus into making your business even better. Good luck, and don’t forget that Wave is cheering you on from the sidelines!
The information and tips shared on this blog are meant to be used as learning and personal development tools as you launch, run and grow your business. While a good place to start, these articles should not take the place of personalized advice from professionals. As our lawyers would say: “All content on Wave’s blog is intended for informational purposes only. It should not be considered legal or financial advice.” Additionally, Wave is the legal copyright holder of all materials on the blog, and others cannot re-use or publish it without our written consent.