Texas LLC Taxes Guide

Starting and operating a Limited Liability Company (LLC) in Texas comes with various benefits, including liability protection and flexible management structures. However, understanding the tax obligations for a Texas LLC is crucial for ensuring compliance and optimizing financial planning. Unlike many other states, Texas does not impose a state-level income tax on individuals or businesses. This makes Texas an attractive location for entrepreneurs and businesses. However, Texas LLCs are subject to other forms of taxation, such as franchise tax and sales tax, which fund essential state services.

Texas Franchise Tax

The Texas franchise tax is a privilege tax imposed on businesses for doing business in Texas. All LLCs must file and pay this tax, which is based on the company’s margin (revenues less certain deductions).

Eligibility Criteria

• Threshold: LLCs with total revenue less than $1,230,000 (as of 2023) are not required to pay any franchise tax but must still file a No Tax Due Report.
• Nexus: LLCs must have sufficient business activity in Texas to be subject to the franchise tax.

Calculating the Texas Franchise Tax

• Margin Calculation: The margin can be calculated in one of four ways:
  1. Total revenue minus cost of goods sold (COGS)
  2. Total revenue minus compensation
  3. Total revenue times 70%
  4. Total revenue minus $1,000,000
• Rates: The tax rate for most entities is 0.75%. For businesses primarily engaged in retail or wholesale trade, the rate is 0.375%.

Required Forms

• Form 05-163: Texas Franchise Tax Report
• Form 05-102: Texas Franchise Tax No Tax Due Report (if applicable)
• Form 05-164: Texas Franchise Tax Extension Request (if applicable)

Texas Sales and Use Tax

Sales tax in Texas applies to the sale of tangible personal property and some services. The state sales tax rate is 6.25%, but local jurisdictions can impose additional sales taxes, bringing the total rate to as high as 8.25%.

Responsibilities for LLCs

• Registration: LLCs must register for a Texas Sales and Use Tax Permit if they sell taxable goods or services.
• Collection and Remittance: LLCs are responsible for collecting the appropriate sales tax from customers and remitting it to the Texas Comptroller of Public Accounts.
• Filing: Sales tax returns must be filed periodically (monthly, quarterly, or annually) based on the volume of sales.

Texas Employment Taxes

If your Texas LLC has employees, you are required to handle several employment taxes, including federal and state taxes.

Federal Employment Taxes

• Federal Income Tax Withholding: Deducted from employees’ wages.
• Social Security and Medicare Taxes (FICA): Employers must match employees’ contributions.
• Federal Unemployment Tax (FUTA): Paid by the employer.

Texas State Employment Taxes

• State Unemployment Tax (SUTA): Texas imposes an unemployment tax on employers to fund unemployment benefits for displaced workers. The tax rate varies based on the employer’s history and the state’s economic conditions.

Required Forms

• Form C-3: Texas Employer’s Quarterly Report (for SUTA)
• Federal Forms: Form 941 (Employer’s Quarterly Federal Tax Return), Form 940 (Employer’s Annual Federal Unemployment Tax Return)

Texas LLCs Federal Tax Obligations

Texas LLCs are subject to federal taxation based on their chosen tax classification:

• Sole Proprietorship: Single-member LLCs are treated as disregarded entities and report income on Schedule C of the owner’s personal tax return.
• Partnership: Multi-member LLCs file Form 1065 and issue Schedule K-1 to each member.
• C-Corporation: LLCs electing corporate taxation file Form 1120.
• S-Corporation: LLCs electing S-corporation status file Form 1120S and issue Schedule K-1 to each member.

Texas LLC Tax Exemptions

Texas provides several tax exemptions that may benefit LLCs:

• Manufacturing Exemption: Exemption from sales tax on machinery and equipment used in manufacturing.
• Research and Development (R&D) Exemption: Exemption for certain purchases used in qualified R&D activities.
• Agricultural Exemption: Exemption for equipment and supplies used in agricultural production.

Due Dates for Texas LLC Taxes

Staying compliant with tax deadlines is essential to avoid penalties and interest charges. Here are the key due dates for Texas LLC taxes:

• Franchise Tax Reports: Due on May 15th each year.
• Sales Tax Returns: Due on the 20th of the month following the reporting period.
• Employment Taxes:
  • State: Quarterly reports are due on the last day of the month following the end of the quarter.
  • Federal: Form 941 is due quarterly, and Form 940 is due annually by January 31st.