Texas Business Tax Guide: Entity Selection, Franchise Tax, Sales Tax, Payroll Tax, and Filing Deadlines

Choosing the Right Business Entity in Texas

Entity choice affects how much you pay in franchise tax, how your profits are taxed at the federal level, and how much liability protection you have. Texas does not tax personal income, so the entity decision here is less about state income tax and more about franchise tax exposure, liability, and federal tax treatment.

Sole Proprietorship

No formation paperwork required. Profits and losses pass through to the owner's personal return on Schedule C. No liability protection. A sole proprietorship is not a taxable entity for Texas franchise tax purposes at all, regardless of revenue, though sole proprietors still owe self-employment tax on net earnings. Forming a single-member LLC changes this. A single-member LLC is a taxable entity for franchise tax even though the IRS treats it as disregarded.

General Partnership

Similar to a sole proprietorship but with two or more owners. No liability protection for partners. Profits pass through via Schedule K-1 to each partner's personal return. A general partnership owned entirely by natural persons is not a taxable entity for franchise tax purposes. Adding a single corporate or LLC partner, or registering as a limited liability partnership, makes the entire partnership taxable.

Limited Liability Company (LLC)

The most common choice for Texas businesses. Provides liability protection while allowing pass-through taxation by default. An LLC can also elect to be taxed as an S corporation once profits reach a level where the payroll tax savings outweigh the added administrative cost. LLCs registered in Texas are subject to franchise tax once revenue exceeds the no-tax-due threshold.

S Corporation

Requires an entity, typically an LLC or corporation, to elect S status with the IRS. Owners who work in the business must take a reasonable salary subject to payroll tax, with remaining profits distributed without additional self-employment tax. This structure often produces the biggest tax savings for profitable service businesses, but it adds payroll administration and stricter compliance requirements. S corporations file Form 1120-S by March 15, a month before the individual deadline.

C Corporation

Taxed separately from its owners at the corporate level, then again when profits are distributed as dividends. Rarely the right choice for a growing business unless you are raising outside investment or planning to reinvest most profits rather than distribute them.

The right structure depends on your revenue, growth plans, and how much administrative work you want to take on. Gurian CPA Firm's business entity formation services walk through this decision with each client individually rather than defaulting to a one-size-fits-all recommendation.

One Big Beautiful Bill Act (OBBBA) Provisions Texas Business Owners Should Know for 2026

The One Big Beautiful Bill Act (OBBBA), signed into law on July 4, 2025, as Public Law 119-21, restored or made permanent several federal tax provisions that directly affect Texas business tax planning.

• 100% bonus depreciation has been permanently restored. Businesses can now fully deduct the cost of qualifying equipment and property in the year it is placed in service, rather than depreciating it over several years. Property must be acquired and placed in service after January 19, 2025, to qualify.
• Section 179 expensing allows businesses to deduct up to $2,560,000 in qualifying purchases for 2026, with the deduction phasing out once total purchases exceed $4,090,000. The Act raised the base limit from $1 million to $2.5 million and made it permanent, with annual inflation adjustments after 2025.
• The Qualified Business Income (QBI) deduction is now permanent at 20% for pass-through entities. For 2026, phase-in begins at $201,750 for single filers and $403,500 for joint filers. The Act also added a $400 minimum deduction for taxpayers with at least $1,000 of qualified business income from an active business.
• Section 174A restores full, immediate domestic research and development expensing for tax years beginning after December 31, 2024, reversing the multi-year amortization requirement that had been in place.

These changes create planning opportunities around equipment purchases, entity structure, and R&D investment. The right move depends on your specific revenue, entity type, and growth plans, which is why Gurian CPA Firm reviews these provisions with clients before year-end rather than after filing.

Texas Franchise Tax: What Texas Businesses Need to Know

The Texas franchise tax is a tax on a business's margin, not its net income. It applies to most LLCs, corporations, limited partnerships, professional associations, and other entities registered to do business in Texas. Sole proprietorships and general partnerships owned entirely by natural persons are not taxable entities and do not file.

No Tax Due Threshold

Businesses with annualized total revenue at or below the no-tax-due threshold owe no franchise tax. For the 2026 and 2027 report years, that threshold is $2,650,000, up from $2,470,000 for the 2024 and 2025 report years. Most entities below the threshold still need to file a Public Information Report or Ownership Information Report to stay in good standing with the Texas Comptroller. The Comptroller adjusts this threshold periodically, so confirm the figure for the report year you are filing rather than the year the revenue was earned. Current rates and thresholds are published on the Texas Comptroller's franchise tax page.

Calculating the Margin

Franchise tax is based on the lowest of four calculations: total revenue minus cost of goods sold, total revenue minus compensation, total revenue multiplied by 70%, or total revenue minus $1 million. The standard rate is 0.75%, and businesses primarily engaged in retail or wholesale trade pay 0.375%. Businesses with total revenue between $2.65 million and $20 million can elect the EZ Computation method. It applies a flat 0.331% rate directly to total revenue, in exchange for giving up the COGS and compensation deductions. Gurian CPA Firm runs all four margin calculations before filing, because the spread between methods is often significant.

Filing Deadline

Texas franchise tax reports are due May 15 each year. An extension is available through Form 05-164, but it extends the filing date only, not the payment date. To keep the extension valid, a business must pay at least 90% of the tax due for the current year or 100% of the tax reported for the prior year by May 15. For filers not required to pay by electronic funds transfer, a valid extension moves the report deadline to November 15. First-year filers cannot use the 100% prior-year option.

Common Mistakes Gurian CPA Firm Sees

• Assuming an LLC with no employees is automatically exempt without checking current revenue against the threshold
• Missing the Public Information Report filing even when no tax is owed
• Applying the wrong apportionment percentage for businesses that operate in multiple states
• Assuming an out-of-state entity has no Texas franchise tax obligation. A foreign entity with $500,000 or more in Texas gross receipts has economic nexus for franchise tax purposes even with no physical presence in the state

Texas Sales and Use Tax

Texas charges a state sales tax rate of 6.25%. Cities, counties, transit authorities, and special purpose districts can add up to 2% on top of that, bringing the maximum combined rate to 8.25%. The exact rate depends on where the sale takes place. A business with locations in both the Dallas and Houston areas may collect different combined rates depending on the specific city and county.

Do You Have Nexus?

Your business likely has a sales tax collection obligation if it has a physical presence in Texas, has employees working in the state, or exceeds $500,000 in total Texas revenue over the preceding twelve calendar months. Texas uses a revenue threshold only. There is no transaction-count test. Many businesses that sell online do not realize they have picked up nexus in Texas simply by shipping enough product into the state.

Filing Frequency

Monthly filing is the default in Texas. A business qualifies for quarterly filing only if it owes less than $500 in state sales tax for a calendar month, or less than $1,500 for a calendar quarter. The Comptroller assigns very low-volume businesses to an annual schedule. The Comptroller notifies each permit holder of its assigned frequency by letter after the sales tax permit is approved, and can reassign it as the business grows. Filing frequencies and due dates are published on the Texas Comptroller's sales and use tax page.

Discounts for Filing on Time

Texas allows a 0.5% discount for filing and paying sales tax on time, plus an additional 1.25% discount for businesses that prepay. Filing late forfeits both.

Exemptions

Certain goods and services are exempt or partially exempt, including many manufacturing inputs such as machinery, electricity, and natural gas used directly in production, and resale transactions with a valid resale certificate on file. The Comptroller publishes the full list of exemptions and the documentation each one requires. In Gurian CPA Firm's experience working with Texas businesses, incorrectly applied exemptions are a frequent source of assessment during a sales tax review.

Getting sales tax collection and remittance set up correctly from the start saves significant cleanup work later. Gurian CPA Firm's business accounting services include sales tax registration and ongoing filing support for clients across both markets the firm serves.

Payroll Tax Obligations for Texas Employers

Texas has no state income tax, so there is no state income tax withholding to manage, but that does not mean payroll taxes are simple. Texas employers still have both federal and state-level obligations.

Federal Payroll Tax Requirements

• Federal income tax withholding from employee wages based on Form W-4
• Social Security and Medicare tax (FICA), split between employer and employee
• Federal Unemployment Tax Act (FUTA) tax, paid by the employer

Texas Unemployment Tax

Employers pay unemployment tax to the Texas Workforce Commission (TWC) rather than the state comptroller. This tax applies only to the first $9,000 each employee earns in a calendar year, a wage base that has not changed since 1997. The TWC does set employer tax rates annually. For 2026, rates range from 0.32% to 6.32%, and new employers pay 2.70% or their NAICS industry average, whichever is higher, until they have accumulated enough claims history for an experience-rated rate. Current rates are published on the TWC's tax rates page.

Reporting Requirements

Employers must file federal Form 941 quarterly, Form 940 annually for FUTA, and TWC wage reports quarterly on Form C-3. New hires and rehires must also be reported within 20 calendar days of the date the employee starts earning wages, to the Child Support Division of the Texas Office of the Attorney General. New hire reporting is a separate obligation from quarterly wage reporting to the TWC, and missing it carries a penalty for each unreported employee.

Where Texas Employers Get Tripped Up

Misclassifying workers as independent contractors when they meet the legal definition of an employee is the most common payroll tax issue Gurian CPA Firm sees in Texas businesses. It carries penalties at both the federal and state level if caught in an audit.

Gurian CPA Firm's payroll services handle federal withholding, TWC unemployment tax, new hire reporting, and quarterly filings so business owners are not tracking multiple deadlines across multiple agencies on their own.

Quarterly Tax Filing Calendar for Texas Businesses

Use this calendar as a working reference. Deadlines shift to the next business day when the date falls on a weekend or federal holiday, so confirm exact dates each year. The IRS publishes the full schedule in Publication 509.

Sales tax filing dates depend on your assigned frequency with the Texas Comptroller. Monthly filers report by the 20th of the month following the reporting month. Quarterly filers report by April 20, July 20, October 20, and January 20. Annual filers report by January 20 for the prior calendar year.

Gurian CPA Firm tracks these deadlines for clients across both Dallas and Houston.

Frequently Asked Questions

Does Texas have a state income tax for businesses?

No. Texas does not levy a state income tax on individuals or on pass-through business income. Businesses may still owe Texas franchise tax, which is based on margin rather than net income, and federal income tax still applies regardless of state.

Who has to file a Texas franchise tax report?

Most LLCs, corporations, limited partnerships, and other entities registered to do business in Texas must file, even if no tax is owed. For the 2026 and 2027 report years, businesses with annualized total revenue at or below $2,650,000 owe no tax but still need to file a Public Information Report or Ownership Information Report. Sole proprietorships and general partnerships owned entirely by natural persons do not file at all.

What is the sales tax rate in Dallas and Houston?

Both markets fall within Texas's combined maximum rate of 8.25%, made up of the 6.25% state rate plus local additions. The exact combined rate depends on the specific city, county, and any transit or special purpose district taxes that apply at your business location.

When are quarterly estimated tax payments due?

Federal estimated tax payments are generally due April 15, June 15, September 15, and January 15 of the following year. These dates shift to the next business day when they fall on a weekend or holiday.

Do I need to collect sales tax if I sell online to Texas customers?

If your business exceeds $500,000 in total Texas revenue over the preceding twelve calendar months, or has any physical presence in the state, you likely have a collection obligation even without a physical store or office in Texas.

How is Texas unemployment tax different from other states?

Texas employers pay unemployment tax to the Texas Workforce Commission rather than a state revenue department, on the first $9,000 of each employee's wages. New employers start at a standard rate before moving to an experience-rated rate based on claims history.

When are partnership and S corporation returns due in Texas?

Federal partnership returns (Form 1065) and S corporation returns (Form 1120-S) are due March 15, a month before the individual deadline. Texas has no state income tax return, but these entities may still owe the Texas franchise tax report due May 15. Gurian CPA Firm handles both filings for clients across Dallas and Houston.

Key Takeaways

• Entity choice in Texas is driven by franchise tax exposure, liability protection, and federal tax treatment, not state income tax, because Texas has none.
• The One Big Beautiful Bill Act made 100% bonus depreciation and the 20% QBI deduction permanent and raised Section 179 expensing to $2,560,000 for 2026, changing the timing of equipment and R&D decisions.
• Most Texas businesses owe no franchise tax because they fall under the $2,650,000 threshold for the 2026 report year, but nearly all of them still have to file an information report by May 15.
• The Texas sales tax rate a business collects depends on the exact location of the sale, and the maximum combined rate is 8.25%.
• Texas employers owe no state income tax withholding but still carry federal payroll obligations plus TWC unemployment tax on the first $9,000 of each employee’s wages.
• Texas businesses structured as partnerships or S corporations file a month earlier than individual filers, on March 15 rather than April 15.

Work With a Dallas and Houston CPA Firm That Knows Texas Tax Rules

Texas tax rules do not work like the rest of the country's, and getting entity selection, franchise tax, sales tax, and payroll tax right from the start prevents costly corrections later. Gurian CPA Firm has guided Dallas and Houston area businesses through these exact decisions since 2003, and the firm responds to every new inquiry within 24 hours.

Explore Gurian CPA Firm's business tax services, or schedule a call to talk through your specific situation.

Gurian CPA Firm - Houston Office
4265 San Felipe Suite 1100
Houston, TX 77027
Phone: 713-987-7698