Texas is one of seven states with no personal income tax—a major reason entrepreneurs choose to form LLCs here. But “no income tax” doesn’t mean “no taxes.” Texas LLCs still have federal tax obligations, self-employment tax, and the Texas franchise tax. Here’s everything you need to know about taxes for your Texas LLC.
Texas LLC Tax Overview
| Tax Type | Applies To | Rate |
|---|---|---|
| Texas State Income Tax | — | None (0%) |
| Federal Income Tax | All LLCs | 10%-37% (individual rates) |
| Self-Employment Tax | Active members | 15.3% |
| Texas Franchise Tax | LLCs over $2.47M revenue | 0.375%-0.75% |
| Federal Payroll Taxes | LLCs with employees | Varies |
| Sales Tax | Applicable goods/services | 6.25% state + local |
No Texas State Income Tax
Texas does not have a personal income tax. This means:
- LLC profits aren’t taxed at the state level
- Members don’t pay state income tax on distributions
- No state tax withholding from paychecks
Compared to other states:
| State | State Income Tax (Top Rate) |
|---|---|
| Texas | 0% |
| California | 13.3% |
| New York | 10.9% |
| Florida | 0% |
| Illinois | 4.95% |
This zero-percent state rate is why many businesses choose Texas.
Federal Income Tax
While Texas doesn’t tax income, the federal government does. How your LLC is taxed federally depends on its structure.
Single-Member LLC (Disregarded Entity)
Default federal treatment:
- LLC profits go directly on your personal return
- Report on Schedule C (Form 1040)
- Pay individual income tax rates (10%-37%)
- No separate business tax return required
Multi-Member LLC (Partnership)
Default federal treatment:
- LLC files Form 1065 (information return)
- Each member receives Schedule K-1
- Members report K-1 income on personal returns
- LLC itself doesn’t pay federal income tax
S-Corp Election
LLCs can elect S-Corp taxation:
- LLC files Form 1120-S
- Members who work in the business receive W-2 wages
- Remaining profits pass through as distributions
- Can reduce self-employment tax
C-Corp Election
LLCs can elect C-Corp taxation:
- LLC files Form 1120 and pays corporate tax (21%)
- Dividends to members are taxed again (double taxation)
- Rarely beneficial for small LLCs
Self-Employment Tax
LLC members who actively participate in the business pay self-employment (SE) tax on their share of profits.
What Is Self-Employment Tax?
Self-employment tax covers Social Security and Medicare:
- Social Security: 12.4% on first $168,600 (2024)
- Medicare: 2.9% on all earnings
- Additional Medicare: 0.9% on earnings over $200,000
Total SE tax rate: 15.3% (up to the Social Security wage base)
Who Pays SE Tax?
| Situation | Pays SE Tax? |
|---|---|
| Single-member LLC owner | Yes |
| Active multi-member LLC member | Yes |
| Passive investor in LLC | Generally no |
| Member taking only distributions (S-Corp) | No (on distributions) |
Reducing SE Tax with S-Corp Election
S-Corp election can reduce SE tax for profitable LLCs:
Without S-Corp:
- $150,000 profit
- SE tax: $21,195 (15.3% × $138,435 + 2.9% on remainder)
With S-Corp (paying $75,000 salary):
- $75,000 salary: $11,475 SE tax
- $75,000 distributions: $0 SE tax
- Savings: ~$9,720
Important: S-Corp election adds complexity and the “reasonable salary” requirement. Consult a tax professional.
Texas Franchise Tax
Texas has no income tax, but it has a franchise tax on businesses.
Who Pays?
All LLCs doing business in Texas are subject to franchise tax. However, most small businesses owe nothing.
No Tax Due Threshold
For 2024: LLCs with annualized total revenue under $2,470,000 owe no franchise tax.
Even with no tax due, you must file the annual report by May 15.
Tax Rates (If Over Threshold)
| Business Type | Rate |
|---|---|
| Retail/Wholesale | 0.375% |
| Other businesses | 0.75% |
| EZ Computation | 0.331% |
Calculating Franchise Tax
If you owe tax, you calculate “margin” by subtracting one of these from total revenue:
- Cost of goods sold
- Compensation
- 70% of revenue
- $1 million
Choose whichever results in the lowest tax.
Filing Requirements
| Revenue | Report Due |
|---|---|
| Under $2.47M | No Tax Due Report (May 15) |
| $2.47M – $20M | EZ Computation or Long Form (May 15) |
| Over $20M | Long Form (May 15) |
Sales and Use Tax
If your LLC sells taxable goods or services, you must collect and remit sales tax.
Texas Sales Tax Rate
- State rate: 6.25%
- Local rate: Up to 2%
- Total: Up to 8.25%
What’s Taxable?
- Most tangible goods
- Some services (data processing, real property repair, etc.)
What’s Exempt?
- Most services
- Groceries (unprepared food)
- Prescription medications
- Some manufacturing equipment
Getting a Sales Tax Permit
If you sell taxable items, register with the Texas Comptroller for a sales tax permit (free).
Payroll Taxes (If You Have Employees)
LLCs with employees must handle payroll taxes:
Employer Responsibilities
| Tax | Rate | Who Pays |
|---|---|---|
| Social Security | 6.2% | Split: employer 6.2%, employee 6.2% |
| Medicare | 1.45% | Split: employer 1.45%, employee 1.45% |
| Federal Unemployment (FUTA) | 0.6% | Employer |
| Texas Unemployment | Varies | Employer |
After credit for state unemployment
Withholding
No state income tax withholding in Texas. You only withhold federal income tax and FICA.
Estimated Quarterly Taxes
LLC members typically pay estimated taxes quarterly since there’s no employer withholding.
Federal Estimated Taxes
Pay quarterly to the IRS using Form 1040-ES:
- April 15: Q1
- June 15: Q2
- September 15: Q3
- January 15: Q4
Penalty for Underpayment
If you owe more than $1,000 when you file and didn’t pay enough estimated taxes, you may owe penalties.
Safe Harbor
Avoid penalties by paying either:
- 90% of current year tax, or
- 100% of prior year tax (110% if AGI over $150,000)
Tax Deductions for Texas LLCs
Reduce taxable income with legitimate business deductions:
Common LLC Deductions
| Deduction | Examples |
|---|---|
| Business expenses | Supplies, software, subscriptions |
| Home office | Dedicated workspace (% of home costs) |
| Vehicle | Business miles or actual expenses |
| Equipment | Computers, machinery, tools |
| Professional services | Accounting, legal, consulting |
| Insurance | Business liability, health (self-employed) |
| Retirement contributions | SEP-IRA, SIMPLE IRA, Solo 401(k) |
| Marketing | Advertising, website, promotions |
| Travel | Business trips (not commuting) |
Qualified Business Income Deduction
The QBI deduction allows eligible LLC owners to deduct up to 20% of qualified business income. Limitations apply based on income and business type.
Texas LLC Tax Calendar
| Date | Obligation |
|---|---|
| January 15 | Q4 estimated federal tax |
| April 15 | Q1 estimated tax + prior year return |
| May 15 | Texas Franchise Tax Report |
| June 15 | Q2 estimated federal tax |
| September 15 | Q3 estimated federal tax |
Common Tax Mistakes
1. Forgetting Self-Employment Tax
LLC income isn’t just subject to income tax—SE tax adds 15.3%. Budget accordingly.
2. Missing Franchise Tax Filing
Even with no tax due, you must file by May 15 or face penalties.
3. Not Making Quarterly Payments
Waiting until April to pay all taxes can result in penalties and a large bill.
4. Mixing Personal and Business Expenses
Keep clear records. Commingling makes deductions harder to defend.
5. Not Saving for Taxes
Set aside 25-35% of profits for taxes throughout the year.
6. Ignoring S-Corp Election
If your LLC is profitable, S-Corp election might save thousands. Evaluate annually.
Working with Tax Professionals
Consider professional help if:
- Revenue exceeds $100,000
- You’re considering S-Corp election
- You have employees
- Business is complex (multiple states, investors)
- You want to maximize deductions
A good CPA pays for themselves through tax savings and peace of mind.
Summary: What Texas LLCs Actually Pay
| Tax | Most Small LLCs |
|---|---|
| Texas Income Tax | $0 |
| Texas Franchise Tax | $0 (under $2.47M) |
| Federal Income Tax | 10-37% on profits |
| Self-Employment Tax | 15.3% on profits |
| Sales Tax | Collect if applicable |
Start Your Texas LLC Today
Texas’s tax environment is favorable for LLCs—no state income tax and a generous franchise tax threshold. Understanding your federal obligations helps you plan properly.
IncCraft forms your Texas LLC and helps you understand your ongoing tax requirements. We handle formation while you focus on building a profitable business.
Form your Texas LLC with IncCraft today.