Texas LLC Taxes
Grasping the tax responsibilities that apply to your Texas limited liability company (LLC) is crucial for ensuring your enterprise adheres to all relevant state and local laws.
This article will take a look at the assorted categories of Texas LLC taxes you’ll need to consider, as well as provide a step-by-step guide on how to properly file your taxes as an LLC in Texas.
Recommended: Schedule a free consultation with 1-800Accountant to stay on top of your taxes.
How Is an LLC Taxed in Texas?
Taxation in Texas isn’t applied in the same way to all LLCs – instead, it varies depending on a number of factors, such as an LLC’s nature, locality, and tax election.
While LLCs typically benefit from pass-through taxation by default, they can elect to be taxed as one of the following:
- C Corporations: The LLC is treated as a separate entity to its owners, paying corporate income tax rates on its total profit while the owners also pay personal income taxes on any distributions they take.
- S Corporations: In return for paying owners a “reasonable salary,” the LLC’s remaining profits are distributed among members without a need to pay FICA or self-employment taxes on them.
The following sections go into the various tax responsibilities of your LLC at local, state, and federal levels in Texas to help you ensure your LLC navigates them effectively.
Texas Local Taxes
The local laws and tax regulations differ greatly between different localities in Texas, where there are currently a number of unique taxes in place at a local level.
Below is a list of tax types that your city or county may impose:
Sales and Use Taxes
If you’re selling goods or services in Texas or selling to Texas customers, you’ll likely need to collect a sales/use tax specific to your locality. These local taxes are capped at 2%, though if imposed, they will need to be collected alongside the state sales/use tax for a combined maximum of 8.25%.
In Texas, there are four types of local entities that can impose these taxes:
- Special purpose districts
- Transit authorities
There are a number of areas in Texas where the boundaries of these local taxing entities overlap, the combined rate of local sales tax is not permitted to exceed the 2% cap. If your business is located in one of these combined areas, it will need to use the combined area code when collecting local tax.
Note: To find the sales and use tax rate that’s in effect in your area, use the Comptroller’s Sales Tax Rate Locator tool.
Generally, to determine which local area’s sales/use tax your LLC needs to pay, the following rules are observed:
- Local Sales Tax: Determined by where your LLC’s place of business is located.
- Local Use Tax: Determined by where the items you sell are typically first stored or used by a customer.
However, there are a number of specific cases where these general rules in Texas may be applied differently, such as:
- Waste Collection and Waste Removal Services: Businesses involved in these industries will need to collect local taxes in the locality where they pick up waste for removal.
- Itinerant Vendors: For nomadic sellers without a place of business in Texas, sales tax must be collected in all local areas in which they sell to customers or make deliveries.
- Vending Machine Sales: Businesses operating vending machines are not considered to have a specific place of business in Texas, so they must collect sales tax in all the local areas of all their vending machines.
For a closer look into the 14 special situations, as well as the requirements of each, see the Texas Comptroller of Public Accounts website.
In Texas, there is no statewide property tax; instead, it is set and managed by each county’s appraisal district and tax assessor-collector's office. These local governmental bodies will appraise the value of your business’s property, applying the local property tax rate to it in order to calculate your tax bill.
For more information on how property tax works in your local area, this means you’ll need to get in contact with either your county’s:
- Appraisal District: For questions about appraisal methodology, exemptions, property values, and special inventory appraisal; or the
- County Taxes Assessor-Collector Office: For questions about tax rates, tax bills, payment options, and any other information related to paying property taxes.
Note: To help you find the relevant contact information, you can use the county tax office directory provided by the Texas Comptroller of Public Accounts.
Recommended: Schedule a free consultation with 1-800Accountant to ensure your business remains legally compliant.
Texas State Taxes
Every state has its own regulations and rules that dictate how it taxes individuals and businesses. Below is a list of the most relevant state-level taxes for LLCs in Texas.
Despite being one of only nine states in the US to not impose state income tax, Texas does enforce a statewide franchise tax that functions more like an income tax for businesses in practice.
This “privilege tax,” which is levied against businesses earning more than $1.23 million in annual revenue, is applied at a rate of 0.375% for wholesalers and retail businesses and 0.75% for all other businesses.
If your LLC needs to pay this tax, it will also be required to submit an annual Franchise Tax Report by May 15 (or the next business day if it falls on a weekend).
Note: While your LLC likely won’t owe any franchise taxes, it will still need to submit an annual No Tax Due Report even if it earns less than the revenue threshold for Texas franchise tax.
In Texas, a sales tax rate is applied at a flat rate of 6.25% that’s added to the price of tangible goods and services sold within the state and paid by consumers – though it can increase up to a statutory maximum of 8.25% depending on the locality your LLC is based in.
Most physical goods (i.e., personal property such as clothes, electronics, and furniture) are taxable – though there are some sales tax exemptions, such as prescription drugs and prepared food.
In addition to this general sales tax, there are a number of additional taxes that are applied to the sale of specific products sold in Texas, including:
- Automotive Oil
- Mixed Beverages
- Tobacco, Cigarettes, and E-Cigarettes
This is only part of the full list of the different goods with separate sales-related taxes in Texas. To ensure your LLC’s compliance, regardless of what it sells, be sure to consult an accountant who can walk you through the requirements.
Note: If your business loans to sell taxable goods or services, you must obtain a sales tax permit from the Texas Comptroller of Public Accounts.
Business Privilege Taxes
In Texas, there are a number of statewide taxes and charges levied on LLCs for the privilege of engaging in certain specific sectors and business activities. The state has authorized a number of these business privilege taxes, with some of the most common ones being:
- Coin-Operated Machines Tax
- Miscellaneous Gross Receipts
- Public Utility Gross Receipts Assessment
- Insurance Taxes, Assessments, and Fees
- Sexually Oriented Business Fee
The specifics of each of these taxes – including rates, filing requirements, and exemptions – will vary on a case-by-case basis, which makes it important to consult an accountant in order to ensure your LLC’s compliance.
Transportation taxes in Texas are a collection of charges imposed specifically on transportation-related items and activities. For businesses that operate vehicles for commercial purposes, there are several key taxes to be familiar with, including:
- Boat and Boat Motor
- Crude Oil
- Motor Fuels, IFTA and Interstate Truckers
- Motor Vehicle Taxes
- Texas Emissions Reduction Plan (TERP) - Off Road Heavy Duty Diesel Equipment Surcharge
For a full list of all the state taxes, as well as more information on how they work, visit the Texas Comptroller of Public Accounts website.
Regardless of where your business is located, if you run an LLC in the US, there are a number of federal taxes you’ll need to pay. Below, we’ve explored some of the main types your LLC may be required to pay for federal tax purposes:
By default, the IRS will not treat single and multi-member LLCs as a separate entity from you for tax purposes. What this means is that you’ll need to report your share of your LLC’s profits on your individual tax returns and pay federal income tax on them at the personal rate of your tax bracket.
Having said that, keep in mind that LLCs can also elect to be taxed as C corps or S corps, which changes how these taxes are levied in different ways.
In addition to income tax, members of single- and multi-member LLCs will need to pay self-employment tax on the share of the business’s profits that they report on their personal tax return at the end of the year.
This tax is levied at a flat rate of 15.3% against businesses with net earnings that exceed $400, though it is applied slightly differently to LLCs that have elected to be taxed as S corps or C corps.
If your LLC hires any employees, it will need to withhold a portion of their salaries to cover various types of taxes on your employees’ behalf – including Social Security, Medicare (FICA), and payroll taxes.
Furthermore, the members of any LLCs that have elected to be taxed as an S corp will be required to pay employment taxes on their salaries. However, in return for this, the remainder of the business’s profit after these salaries have been distributed will be safe from both self-employment and FICA taxes.
If your LLC engages in certain types of business (such as the sale of alcohol and tobacco or operating a heavy highway vehicle, among others), it may need to pay federal excise taxes in order to do so legally. Each excise tax comes with its own set of rules, rates, and filing obligations you’ll need to be aware of.
Understanding and fulfilling these federal tax obligations is crucial for keeping your LLC compliant and avoiding unnecessary financial penalties and/or fines.
How to File LLC Taxes in Texas
Below, we’ve outlined the general process an LLC in Texas will need to follow in order to file their tax return correctly. Note that the specificities of each step will vary slightly depending on how your LLC is organized and the specific locality it’s based in.
Step 1: Gather Your Documentation
To ensure accurate tax filing, thorough record-keeping is essential. Begin by collecting your personal information, including:
- You and your partner’s Social Security number, date of birth, and residential address
- The previous year’s tax returns
- Your LLC’s Employer Identification Number (EIN)
Then, you’ll need to gather all documentation related to your business’s income, such as:
- Invoices you’ve issued
- Sales transaction logs
- Electronic payment reports from services like PayPal or Stripe
Lastly, assemble all records pertaining to your business expenses, which should cover:
- Lease receipts for your business premises
- Bills for utilities
- Records of office supplies purchases
- Documentation of business-related travel
- Payroll records for employees
Note: Depending on how your LLC is organized and its tax election, you may need different information for your tax return.
Step 2: Find The Right Tax Forms
Once you've gathered all necessary documents, the next step is to select the correct tax forms for your LLC based on its organization:
- Single-Member LLCs: The business’s total income and expenses are reported on a Schedule C form, which is attached to the owner’s personal tax return and due by April 15 or the following business day if it lands on a weekend or holiday.
- Multi-Member LLCs: File an information return using Form 1065. Members must fill out a Schedule K-1 showing their individual earnings or losses by March 15 or the next business day.
- C Corporations: File a corporate tax return using Form 1120 by the April 15 deadline or on the next business day if it's a weekend or holiday.
- S Corporations: Use Form 1120-S for the corporate tax return and distribute Schedule K-1 forms to shareholders for reporting their shares of profits or losses. The deadline for filing taxes using 1120-S is March 15 or the following business day.
Since state and local taxes will have their own individual forms and requirements, we recommend contacting your municipality or hiring an accountant for guidance.
With the appropriate documentation gathered and the correct tax forms for your business entity on hand, you’ll be ready to fill them out and submit them.
Step 3: File Your Taxes
The majority of businesses choose electronic filing for its speed, enhanced security, and reliability compared to paper filing, which can be slower and more prone to errors. Here’s how it works:
- Federal Tax Returns: The IRS provides two electronic services for tax submission: Free File for businesses with an AGI below $72,000 and Free Fillable Forms for those above the threshold.
- State and Local Tax Returns: Depending on the specific tax, the filing requirements can vary. The Texas Comptroller of Public Accounts provides information on the ways to report these different taxes.
Note: These electronic filing tools are best suited for those who are already confident in handling their LLC taxes as if filling out a paper form.
For new business owners, we recommend opting for the expertise of a tax professional in order to ensure both accuracy and compliance in your tax filings.
Recommended: Schedule a free consultation with 1-800Accountant to stay on top of your taxes.
Keep Your Texas LLC Compliant
While LLCs are generally easier to maintain than corporations, there are certain state and local formalities your LLC must satisfy in order to remain compliant.
Texas LLC Annual Report
Unlike many other states, LLCs in Texas are not required to submit an annual report to the Secretary of State. However, as mentioned above, your business will need to submit an annual franchise tax report instead – even if it makes less than the threshold for this tax.
Annual franchise tax reports in Texas must be submitted by May 15, or the following business day if this date falls on a weekend or holiday. Filing your reports late incurs a $50 fine per report, while delayed franchise tax payments incur penalties that increase over time: 5% for payments up to 30 days late and 10% for payments exceeding 30 days.
Licensure and Tax Requirements
In Texas, almost all businesses are required to obtain various licenses and permits at the local, state, and federal levels. Below, we’ve broken down three of the most common types your LLC may need:
- Sales Tax Licenses: If your LLC plans to sell or lease physical goods that would typically need to pay sales tax, you’ll need to obtain a specific license online from the Texas Department of Treasury.
- Professional Licenses: If your LLC plans to operate in a specialized sector such as healthcare, law, or accounting, it will be required to secure a professional license pertinent to that field. For example, to start an accountancy firm, you’d first need to obtain the relevant license from the Texas State Board of Public Accountancy.
- Environmental Permits: If your business engages in operations that might affect the environment, it will probably require certain permits to legally operate, such as the Texas Pollutant Discharge Elimination System (TPDES) permit, in order to legally release pollutants.
Note: For a full list of the statewide licenses and permits your LLC may need, refer to the Texas Business Licenses & Permits Guide provided by the state’s Business Permit Office.
Texas LLC Taxes FAQs
The Texas taxes your LLC will be required to pay can vary depending on your business’s nature and the tax election it’s selected. Typically, your LLC will need to pay federal self-employment tax and personal income tax in addition to a statewide sales tax and any additional local charges that may apply.
For more information on this, see the section on state LLC taxes above.
LLCs are not inherently tax-exempt in Texas, as exemptions are based on a business’s activities rather than its structure. As an example, some non-profit activities may qualify for tax exemption in Texas, but a typical LLC conducting business in this state will be subject to the applicable taxes.
To find out more about this topic, see our LLC Taxes article.
In Texas, every LLC is mandated to file an annual franchise tax report. While an LLC will only owe franchise tax if their earnings exceed the $1.23 million threshold, all businesses must file this report regardless of their profits.
The amount a Texas business owner will pay in business taxes varies depending on business profits, as well as its size and specific location within the state. For example, businesses earning more than $1.23 million in annual revenue will need to pay franchise tax, while those who employ at least one full-time worker will need to pay employer taxes.
See our Texas LLC formation article for more information.