Texas has a well-earned reputation as a taxpayer-friendly state. It imposes no personal state income tax, and its business taxes are much lower than those in most other states. In fact, small businesses can often end up with little or no liability for state business taxes in Texas. But it’s important to understand the tax rules and regulations. For example, those with no tax due typically still have reporting obligations, and businesses with no physical location in Texas may still owe Texas business taxes.
Below are some frequently asked questions (and answers) about small business taxes in Texas.
How does Texas tax businesses?
Taxable Texas businesses are subject to a franchise tax, rather than a corporate tax. Corporate taxes are generally assessed based on a business’s profits, while the Texas franchise tax, on the other hand, is based on gross receipts.
What is the “no tax due” threshold?
Businesses with gross receipts at or under the “no tax due” threshold will pay no franchise tax in Texas. For 2023, the threshold is $1.23 million. If your gross receipts are at or under the applicable threshold, you must electronically file Form 05-163, “No Tax Due Report.”
What is the franchise tax rate?
If your gross receipts for the tax year exceed the “no tax due” threshold, the following franchise tax rates apply:
- 0.75 percent (0.0075) for most entities
- 0.375 percent (0.00375) for qualifying wholesalers and retailers
- 0.331 percent (0.00331) for those entities with $20 million or less in annualized total revenue using the EZ computation.
The EZ computation is done on a simple one-page form. Businesses that go this route forego any credits for the tax year, and the tax is calculated on actual revenue. (See below for the tax base for entities that don’t opt for the EZ computation.)
What are “qualifying wholesalers and retailers”?
Qualifying retailers and wholesalers are businesses that are primarily engaged in retail or wholesale trade. You qualify if:
1) The total revenue from your retail or wholesale activities is greater than the total revenue from your activities in non-retail or -wholesale activities;
2) Except for certain eating and drinking places, less than 50 percent of your total revenue
from retail or wholesale activities comes from the sale of products produced by you or
an entity that’s part of an affiliated group to which you also belong; and
3) You don’t provide retail or wholesale utilities, including telecommunications services, electricity, or gas.
What is the tax base that the regular franchise tax rate is applied to?
The tax base for the Texas state franchise tax is your “margin,” meaning the lowest of:
- Seventy percent of your total revenue,
- Your total revenue less the cost of goods sold (generally, the costs related to the acquisition and production of goods),
- Your total revenue less compensation (subject to a per-person limit; for 2023, the limit is $400,000), or
- Your total revenue is less than $1 million.
Are any businesses exempt from the franchise tax?
Several entities qualify for an exemption, including:
- Sole proprietorships (except for single-member LLCs), and
- General partnerships that are owned entirely by individuals, as opposed to other entities (except for limited liability partnerships).
In addition, new veteran-owned businesses aren’t subject to the Texas franchise tax for their first five years. To qualify, a veteran-owned business must:
- Be an entity formed or organized in Texas on or after Jan. 1, 2016, and before Jan. 1, 2020, or on or after Jan. 1, 2022, and before Jan. 1, 2026,
- Be 100 percent owned by a natural person (or persons), each of whom was honorably discharged from a branch of the United States armed services, and
- Provide a letter from the Texas Veterans Commission verifying the honorable discharge of each owner.
A taxable entity that’s verified as a new veteran-owned business must file a Form 05-163, “No Tax Due Report” for each tax year the franchise tax isn’t imposed.
Does the type of business entity matter?
Yes. For example, as mentioned above, sole proprietorships and certain general partnerships are exempt from the franchise tax in Texas. For other businesses, the ultimate impact of the entity type will depend on annualized revenue.
S corporations are subject to the Texas franchise tax. S corps pass their corporate income, losses, deductions, and credits through to their shareholders. But, if an S corporation’s annualized revenues don’t exceed the no-tax due threshold, the revenues are basically tax-free in Texas because the shareholders also won’t be subject to personal income tax on their income from the business. This applies to limited liability companies, too.
Partnerships—including limited partnerships and limited liability partnerships—are also subject to the franchise tax but can take advantage of the no-tax threshold.
Are any franchise tax credits available?
- Qualified research and development activities
- The credit generally equals a percentage of the excess of your qualified research expenses (QREs) in Texas for the tax year over a base amount of 50 percent of your average QREs in Texas in the three previous tax years.
- Historic structure rehabilitation
- This credit is worth up to 25 percent of eligible costs and expenses incurred in the certified rehabilitation of a certified historic structure placed in service on or after Sept. 1, 2013.
- Certain clean energy projects
- This credit equals the lesser of $100 million or 10 percent of the total capital cost of a qualified project.
I’ve heard that a business doesn’t have to pay the franchise tax if the tax amount is under $1,000. Is that true?
If your tax due for a year is less than $1,000, you owe no franchise tax, but you’re still required to file a Form 05-158, “Texas Franchise Tax Report” or Form 05-169, “Texas Franchise Tax EZ Computation.” You also must file the appropriate information report(s): Form 05-102, “Public Information Report,” and/or Form 05-167, “Ownership Information Report.”
Do I need to pay estimated franchise tax payments throughout the year?
No. Unlike the federal government and many state governments, Texas doesn’t require estimated payments (also known as quarterly taxes).
Do I have to worry about the Texas franchise tax if my business isn’t located in the state?
Possibly. Liability for state taxes generally requires what’s called nexus, which is essentially a relationship sufficient to justify imposing taxes. Texas, like many states, may impose taxes even on entities with no physical presence within its boundaries, based on “economic nexus.”
Specifically, a business has economic nexus with Texas for tax purposes if it has annual gross receipts from business done in Texas of $500,000 or more, regardless of whether or not it has a physical presence in the state. Additionally, a business with a Texas use tax permit is presumed to have nexus (see below for information on Texas sales and use taxes).
What is the filing deadline for franchise taxes?
The annual franchise tax report must be filed with the Texas Comptroller and is due May 15 every year. If May 15 falls on a weekend or holiday, the due date will be the next business day. Each taxable entity must file a Franchise Tax Report (No Tax Due, EZ Computation, or Long Form) and an Information Report (Public Information Report or Ownership Information Report).
There is a $50 penalty for a franchise tax report filed after the due date, even if no tax is due with the report. Extensions may be available.
Are there other taxes in Texas that could affect a business?
Yes. For example, Texas has a state sales and use tax. The base rate of 6.25 percent applies to all retail sales, leases, and rentals of most goods, as well as taxable services, including:
- Amusements
- Cable television and bundled cable
- Credit reporting
- Data processing
- Debt collection
- Information services
- Insurance services
- Internet access
- Laundry, cleaning, and garment services
- Motor vehicle parking and storage
- Nonresidential real property repair, restoration, or remodeling
- Personal property maintenance, remodeling, or repair
- Personal services
- Real property services
- Security
- Telecommunications
- Telephone answering
- Utility transmission and distribution
- Taxable labor (for example, photographers, draftsmen, artists, and tailors)
Municipalities can add up to 2.0 percent in local use taxes, for a maximum of 8.25 percent. Businesses must collect both state and local sales and use taxes on their goods and services.
If you sell or lease goods or taxable services in Texas, you must apply for a sales tax permit. You’re required to file tax returns and payments on or before the 20th day of the month following the applicable period. (The period depends on whether the business is classified as a quarterly or monthly filer.) The specific reporting and paying requirements depend on the amount of taxes paid in the preceding state fiscal year (September 1 through August 31).
Texas also has an unemployment insurance tax. Liable employers must register with the Texas Workforce Commission to establish a tax account. In each calendar quarter, you’ll need to report wages paid to employees and pay taxes due. Only the first $9,000 paid to an employee during a calendar year constitutes “taxable wages.” Quarterly wage reports and taxes must be filed and paid by the last day of the month following the end of the calendar quarter.
The unemployment insurance tax is low in Texas. According to the Texas Workforce Commission, the minimum unemployment insurance tax rate paid by Texas employers in 2023 will be 0.23 percent. The maximum rate, paid by only 4.2 percent of Texas employers, will be 6.23 percent.
The state also imposes excise taxes that could affect small businesses. These include taxes on:
Finally, while the Texas Comptroller doesn’t collect property taxes, local taxing authorities may collect this tax.
Do remote sellers have state sales and use tax collection obligations?
Remote sellers are based outside of Texas, and their only activity in the state is the remote solicitation of sales by way of the internet, telephone, radio, television, catalogs, or flyers. Remote sellers may have Texas tax collection and reporting obligations if they have economic nexus in the state.
Texas has a safe harbor for remote sellers with total Texas revenue of less than $500,000 in the preceding 12 calendar months, though. These businesses aren’t required to obtain a tax permit or collect, report, and remit state and local use tax.
Your total Texas revenue is based on gross revenue from taxable and nontaxable sales of goods and services in Texas. The amount includes separately itemized handling, transportation, installation, and other similar fees you collect. It also includes sales for resale and sales to exempt entities.
If you don’t qualify for the safe harbor, you must obtain a permit and begin collecting and remitting state and local use tax on sales to customers in Texas beginning no later than the first day of the fourth month after the month you exceed the $500,000 safe harbor amount.
For example, if, during the period of July 1, 2023, through June 30, 2024, your total Texas revenue exceeds the safe harbor, you must obtain a permit by October 1, 2024, and begin collecting use tax. You also must keep records of your sales in Texas.
A remote seller that sells only through a marketplace provider (for example, Amazon, eBay, Walmart Marketplace, and Etsy) that certifies it is collecting and reporting sales and use tax on the remote seller’s behalf isn’t required to hold a Texas tax permit. However, all sellers must keep the required records of all marketplace sales for at least four years.
Do remote sellers have local use tax obligations?
Maybe, depending on where your Texas buyers are located. Local use tax is due at the location in Texas where the order is shipped or delivered if the order isn’t received or fulfilled from a Texas place of business. You can use the Texas Comptroller’s Sales Tax Rate Locator to search for tax rates by address.
If you’d like to avoid the headaches and hassles of searching for the address of every one of your Texas customers, you can instead use the “single local use tax rate.” The current rate is 1.75 percent, and the rate is updated in the Texas Register annually by January 1. Note that the single local use tax rate isn’t available to any marketplace provider collecting taxes on behalf of marketplace sellers or businesses located in Texas.
If you choose to collect the single local use tax, you must notify the Texas Comptroller’s office in writing of your election using Form 01-799, “Remote Seller’s Intent to Elect or Revoke Use of Single Local Use Tax Rate.” The effective date must be on the beginning date of a reporting period. For example, if you elect to collect the single local use tax rate in February, the single local use tax rate would be effective in March (with the return due April 20).
You can stop collecting the single local use tax rate if you notify the Texas Comptroller’s office via Form 01-799, “Remote Seller’s Intent to Elect or Revoke Use of Single Local Use Tax Rate.” If you notify the office before October 1, you must continue to use the single local use tax rate until the end of the calendar year. If you provide the notice on or after October 1, you must continue to collect the single local use tax rate until the end of the following year.
