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How Your LLC Will Be Taxed
In this guide, you'll learn about the main types of Texas business tax you'll be responsible for, including sales, self-employment, payroll, and federal taxes. Profits from an LLC aren’t taxed at the business level the way they are in C Corporations. Instead, they're as follows:
- Owners pay self-employment tax on business profits.
- Owners pay federal income tax on any profits, less allowances and deductions.
- Some LLCs pay Texas sales tax on products or services.
- Employers pay payroll tax on wages paid to employees.
- Employees pay federal income tax on their earnings.
Items 1 and 2 fall under pass-through taxation for LLC owners, managers and members who profit from the business. Profits are reported on personal federal tax returns.
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State Taxes for LLCs
There are two state taxes you must pay to the Texas Comptroller: sales and franchise. Depending on how your business is set up, you may also need to pay use tax.
Texas Income Tax
Texas is one of nine states that do not have income taxes.
Texas Sales Tax
If you sell physical products (such as electronics, books, cars, furniture, appliances, raw materials, etc.) or certain services, you may need to collect Texas sales tax at the point of purchase. You'll remit the taxes you collect to the Texas Comptroller.
In Texas, some items such as medication and some grocery items are exempt from sales tax. The state's Administrative Code, Title 34, Part 1, Chapter 3, Subchapter O, contains an extensive list of TX sales tax rules and exemptions applicable to numerous organizations, services, and products.
The Texas sales tax rate is 6.25% statewide. Local taxing jurisdictions, such as cities and counties, may also impose sales tax at a rate of up to 2% for a total maximum combined rate of 8.25%.
Use our sales tax calculator to get an idea of what you'll need to pay, but always check with your accountant and the TX Comptroller to find out whether your business is required to collect sales tax and ensure you remain in compliance.
Texas Use Tax
If you purchase physical products outside the state for use in Texas, you may need to pay a use tax.
For example, if you buy furniture for your TX LLC from a company in a state that either doesn't have a sales tax or has a sales tax that is lower than the Texas sales tax, you'll be responsible for paying the use tax.
The current Texas use tax rate is 6.25%, and you'll pay it directly to the Texas Comptroller.
Texas Franchise Tax
Some states — including Texas — levy a tax on certain businesses for the right to exist as a legal entity and do business in the state. This is usually called a franchise tax, transaction tax, or privilege tax. Despite its name, this is not a tax on franchises. It is an essential part of filing taxes for your LLC.
The Texas franchise tax rate depends on the amount of revenue your business generates and a few other factors. In fact, if your revenue is below a certain threshold, you won't owe any franchise tax at all.
However, you must still file an annual franchise tax report stating there is no tax due. Failure to do so can result in your LLC losing the right to do business in Texas and possibly having to pay a fine to reinstate it.
Texas Public Information Report
When you file your franchise tax report, you must also file a Texas Public Information Report. This document collects your LLC's information (business address, member names, titles, etc.), which the Comptroller forwards to the Secretary of State. The SOS maintains that information in the state's business records registry. This is the information you access when you perform a Texas business entity search to name your business.
You'll find all the forms you need to file and pay your TX Franchise Tax and file your TX Public Information Report on the Comptroller's website.
Talk to your accountant or tax preparer, or contact the TX Comptroller to determine whether you're required to pay the franchise tax and to ensure you're paying the correct amount.
Federal Taxes for LLCs
As the owner of an LLC, you must pay self-employment tax and federal income tax, both of which are levied as “pass-through taxation“.
Federal taxes can be complicated, so speak to your accountant or professional tax preparer to ensure that your Texas LLC is paying the correct amount.
Federal Self-Employment Tax
All members or managers who take profits out of the LLC must pay self-employment tax. This tax is administered by the Federal Insurance Contributions Act (FICA) and covers Social Security, Medicare, and other benefits. The current self-employment tax rate is 15.3%. You’ll be able to deduct some of your business expenses from your income when calculating how much self-employment tax you owe.
Here are some examples of how much self-employment tax you may need to pay, depending on your earnings:
- On profits of $20,000, you would pay a self-employment tax of $3,060.
- On profits of $50,000, you would pay a self-employment tax of $7,650.
- On profits of $90,000, you would pay a self-employment tax of $13,770.
- On profits of $120,000, you would pay a self-employment tax of $18,360.
Pay Less Self-Employment Tax by Treating Your LLC as an S Corporation
The Internal Revenue Service allows an LLC to be treated as an S Corporation for tax purposes, provided your business meets certain requirements. This can help you reduce the amount of self-employment tax you pay by allowing you to declare some of your income as salary and other income as distributions or withdrawals.
Consult with your accountant or tax advisor for more information on reducing your LLC self-employment tax through an S Corporation tax election.
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Federal Income Tax
You must also pay regular federal income tax on any earnings you take out of your LLC. The amount of income tax you pay depends on your earnings, current income tax bracket, deductions, and filing status.
You only pay federal income tax on profits you take out of the business, less certain deductions and allowances. This includes your tax-free amount, plus business expenses and other deductions for areas such as healthcare and some retirement plans.
Speak to your accountant for more information.
Employee and Employer Taxes
If you pay employees, there are some slightly different tax implications. Speak to your accountant to get clear guidance for your unique situation.
Employer Payroll Tax Withholding
All employers are required to withhold federal taxes from their employees’ wages. You’ll withhold 7.65% of their taxable wages, and your employees will also be responsible for 7.65%, adding up to the current federal tax rate of 15.3%.
Speak to your accountant for more information.
Employees May Need to File Tax Returns
Regardless of whether you withhold federal and state income tax, your employees may need to file their own tax returns.
Employee Insurance and Other Requirements
You may also need to pay insurance for any employees, such as employee compensation insurance or unemployment tax.
Other Taxes and Duties
Depending on your industry, you may be liable for certain other taxes and duties. For example, if you sell gasoline, you may need to pay a tax on any fuel you sell. Likewise, if you import or export goods, you may need to pay certain duties.
Speak to your accountant about any other taxes or duties you may need to withhold or pay.
Most LLCs must pay estimated taxes throughout the year, depending on the amount of profit and income you expect to make. The most common types of estimated tax are:
- Federal income tax
- Federal self-employment tax
Most LLCs will pay estimated taxes on a quarterly basis. Learn more on the IRS website, and speak to your accountant for more information.
FAQs on Texas Business Taxes
Does Texas Have Sales Tax?
Yes. Texas does have a sales tax, which may vary among cities and counties. You can find more information above.
Does Texas Have a State Income Tax?
No. Texas does not have a general state income tax.
Does Texas Have a Franchise Tax?
Yes. Texas does have a franchise tax. You'll find more information above.
Do I Need to File a Franchise Tax Report Every Year?
Yes. Even if you don't owe any franchise tax, you must still file a report to that effect. Find out more about Texas filing requirements compliance.
Do I Need to Pay Estimated Taxes?
Yes. In most cases, you must pay estimated taxes to the federal government. You'll find more information above.