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Start Hiring For FreeRunning a small business in Texas can feel like navigating a complex maze of taxes and regulations. Most business owners would likely agree that making sense of all the rules is an ongoing struggle.
The good news is that this guide will provide clarity, walking you step-by-step through the key taxes, incentives, deductions, and compliance requirements for Texas small businesses. Following the strategies outlined here will help you operate legally, efficiently, and profitably.
You'll get answers to critical questions like what taxes you need to pay, how to leverage incentives and deductions to lower your tax bill, tips to avoid penalties, and more. Whether you're just starting out or looking to streamline an existing business, this Texas tax guide has the insights you need to confidently manage your small business taxes.
Texas has a complex tax structure that can be challenging for small business owners to navigate. Key taxes that small businesses must comply with include sales tax, franchise tax, income tax, employment taxes, and property tax. Understanding filing requirements, tax rates, and deadlines is crucial for avoiding penalties.
The main state taxes that small business owners in Texas need to be aware of include:
Staying current on Texas tax obligations is crucial for compliance. Small business owners should work with a qualified tax professional to ensure they remain compliant.
As a Texas small business owner, key sales tax requirements include:
Utilizing software can help properly calculate, file, and remit sales tax due.
The Texas franchise tax is a privilege tax imposed on each taxable entity doing business in Texas. Key aspects include:
Strategies like forming certain entity types can reduce franchise tax liability for small businesses.
As a Texas employer, key employment tax obligations include:
Staying current on employment tax filing deadlines and payment requirements is essential to avoid penalties for non-compliance.
In Texas, property tax applies to assets like real estate, equipment, inventory, and more. Key aspects for small businesses include:
Understanding property tax obligations based on assets owned can help businesses properly account for this expense.
Texas has a favorable tax environment for small businesses. Here are some of the key things to know:
Texas does not have a business income tax. This can result in major savings compared to states that do impose this kind of tax.
While Texas doesn't have a business income tax, it does impose a franchise tax on certain entities like corporations and LLCs. Here are some franchise tax details:
So for many small businesses, the franchise tax obligation is very low or nonexistent.
Texas has a 6.25% statewide sales tax that applies to most transactions. Specific items may be exempt. Businesses must collect and remit sales tax on taxable sales.
Texas has one of the higher average property tax rates in the U.S. But for small businesses that don't own extensive real estate, this tax is often not too significant.
Small businesses need to register for the appropriate permits and licenses. Key Texas agencies to contact are the Texas Comptroller's Office and Texas Workforce Commission.
LLCs in Texas are subject to two main types of taxes: sales tax and franchise tax.
All businesses in Texas, including LLCs, must collect and remit sales tax on taxable goods and services sold in the state. The state sales tax rate is 6.25%, but local jurisdictions can add up to 2% for a maximum possible rate of 8.25%.
LLCs are responsible for registering for a sales tax permit, collecting sales tax from customers, filing regular sales tax returns, and remitting the tax to the Texas Comptroller. There are some exemptions, like for certain grocery items, but most goods and services are taxable.
Texas also levies a franchise tax on most LLCs and corporations doing business in the state. The tax rate is 1% of taxable margin, which is based on a business' total revenue minus either costs of goods sold or compensation expenses.
The minimum franchise tax payment is $300 per year for newly formed entities. There are some exemptions from franchise tax, like for some smaller LLCs with total revenue under $1.18 million.
So in summary, most Texas LLCs must pay both sales tax and franchise tax. Careful recordkeeping and working with an accountant can help LLC owners properly comply with Texas tax obligations.
Texas offers a very tax-friendly environment for sole proprietors and small businesses. Unlike most states, Texas does not levy personal income tax or business tax on sole proprietors. This allows sole proprietors to retain more of their hard-earned profits to reinvest and grow their businesses.
Specifically, the key taxes that sole proprietors need to pay in Texas include:
That said, Texas does offer valuable tax incentives and credits to benefit small businesses, like the franchise tax exemption for businesses under $1 million in total revenue. Sole proprietors should leverage an accountant to maximize available tax deductions and fully comply with Texas tax rules. With some planning, sole proprietors can minimize their Texas tax liability.
The State of Texas aligns with the federal Small Business Administration's (SBA) definition of a small business. According to the SBA, a small business is an independently owned and operated company with fewer than 500 employees.
Specifically, the SBA categorizes small business size standards based on 6-digit North American Industry Classification System (NAICS) codes. While the general threshold is 500 employees, the SBA uses average annual receipts or number of employees to determine eligibility for Federal small business assistance programs.
For example, under NAICS code 541211 (Offices of Certified Public Accountants), annual receipts under $11 million are considered a small business. For NAICS code 541219 (Other Accounting Services), it's annual receipts under $8 million.
Some key facts about small business size standards in Texas:
So in summary, small businesses make up the backbone of Texas' economy. For tax and regulatory purposes, Texas aligns with the federal SBA definition based on 6-digit NAICS codes and number of employees or annual receipts. Most small firms have fewer than 20 employees.
Texas has no state income tax, but small businesses still need to pay various other state and local taxes. Proper tax planning can help reduce your tax liability and keep more profits. This section outlines key strategies and insights for small business owners to optimize their Texas taxes.
The tax obligations for small businesses depend on the legal structure you choose. Here is a comparison:
For small businesses, S corps, LLCs, and partnerships generally provide the most tax savings compared to C corps. Consult a tax professional to determine the best structure for your business.
Texas offers over 300 economic development incentives, grants, and tax breaks to attract businesses. Major programs include:
Determine your eligibility and apply early to maximize potential incentives. Maintain detailed records to substantiate claims.
Key federal deductions for Texas small businesses include:
Texas does not allow deductions for inventory costs or state income taxes, but otherwise generally follows federal rules. Keep detailed mileage logs, equipment invoices, etc. to support all deductions claimed.
Follow these best practices for Texas tax compliance:
Automating recordkeeping and working with a tax preparer can help ease administrative burdens.
Follow these tips to handle Texas tax audits:
Proactively preparing can help streamline the audit process and achieve more favorable outcomes.
When preparing to file your Texas small business taxes, the first step is to gather all relevant documentation. This includes income statements, balance sheets, receipts for deductions and expenses, Form W-2 and 1099-MISC for employees and contractors, and any other tax documents.
Make sure to also have your Texas tax ID number and supporting details on hand. Track income, expenses, assets, and liabilities in an organized manner throughout the year to simplify tax preparation. Common deductions include office supplies, utilities, vehicle mileage, employee wages, insurance, legal fees, advertising costs, and more. Consult an accountant to ensure you capture all eligible write-offs.
Next, select your business structure - sole proprietorship, partnership, LLC, or corporation - as this impacts how you file and what forms are needed. Sole proprietors can use Schedule C, while most other entities will file Form 1065 or 1120.
Then, determine if you need to collect and remit any Texas sales tax or pay Texas franchise tax. This depends on your business activities and legal formation.
Finally, review prior year tax returns and use the Texas small business tax calculator to estimate your tax liability. This allows you to plan payments and avoid underpayment penalties.
The online Texas small business tax calculator provided by the Texas Comptroller allows users to conveniently estimate their annual taxes based on entity type, income, deductions and other key inputs.
To start, select whether you file as a sole proprietor, partnership/LLC, or corporation. Input your gross annual revenues and any eligible deductions, including employee wages, inventory costs, utilities, vehicle expenses and more.
The calculator auto-computes your estimated net taxable income. It then applies the appropriate Texas tax rates and deductions to display your total estimated tax owed.
Compare this figure to prior year tax returns to gauge if you need to increase or decrease quarterly estimated payments. Monitor projections regularly and adjust withholding if needed.
The tax estimator is a useful planning tool. By modeling different income and deduction scenarios, you can project tax bills based on business growth plans or cost-cutting initiatives. This allows you to make data-driven decisions to optimize cash flow.
To avoid penalties, it is essential to meet all Texas tax filing and payment deadlines applicable to your small business. These include:
If unable to meet a deadline, file for an automatic 7-month extension. Then file returns by the extended deadline and pay all owed taxes to minimize late fees. Manage deadlines proactively to maintain compliance. Consider enlisting a tax professional for guidance navigating requirements.
Texas provides several payment options to remit annual income taxes, estimated quarterly income taxes, monthly or quarterly sales taxes, and annual franchise taxes, including:
Evaluate cash flow needs, account balances and upcoming expenditures before selecting a payment method. Automate payments via EFT or recurring online transfers whenever possible to prevent missed deadlines.
Maintaining diligent Texas tax compliance and recordkeeping is key to avoiding penalties for errors, underpayment or late submissions. Best practices include:
Following Texas tax rules, utilizing planning tools like the small business tax calculator, meeting deadlines, and keeping meticulous records reduces audit risk exposure and prevents costly penalties for small business owners. Consider enlisting a tax professional for guidance.
To create a sole proprietorship in Texas, you must register your business name by filing an Assumed Name Certificate with your county clerk's office. The next step is to obtain any necessary tax permits and licenses from the Texas Comptroller's office, such as a sales tax permit if you plan to sell taxable goods or services.
You may also need to register with the Texas Workforce Commission if you plan to hire employees. As a sole proprietor, you can operate under your own name or choose a business name - just make sure it complies with legal naming requirements and is distinguishable from other registered businesses.
As a sole proprietor in Texas, you must pay self-employment tax on your business's net earnings. This tax goes toward Social Security and Medicare. You will also need to make quarterly estimated income tax payments to avoid penalties.
You can deduct valid business expenses, including supplies, mileage, home office expenses, health insurance premiums, and other qualifying costs to reduce your taxable income. Careful record keeping is key to maximize write-offs.
If selling taxable goods or services, you'll need a Texas sales and use tax permit. Service businesses may also require professional licenses and other regulatory permits. Research the requirements for your industry.
Comply with any municipal or county permits for your geographic area. Stay current on renewal deadlines for all licenses and permits to avoid disruptions to your business.
If hiring employees, register with the Texas Workforce Commission to get an unemployment tax account number. You must also carry workers' compensation insurance, pay employment taxes, comply with wage laws, and adhere to anti-discrimination statutes.
Post required labor law notices in your workplace and keep detailed payroll records. Stay current on changing regulations to avoid fines for non-compliance.
File a Schedule C along with your personal income tax return annually to report your business's income and expenses. You may owe quarterly estimated payments and self-employment tax as well.
Maintain detailed records to track income and deductions. Consider using accounting software to simplify bookkeeping. Seek professional tax preparation help if needed to maximize write-offs and ensure full compliance.
Stay organized year-round so tax filing goes smoothly. Keep all receipts and financial documents in case of an audit. Research tax credits and incentives that could yield additional savings.
This section will provide a summary of key takeaways from the Texas tax guide for small businesses:
To optimize Texas taxes, small businesses should:
The Texas Comptroller website provides many tax resources for small business owners, including:
Additional Texas state agencies assisting small businesses:
Use these affordable public resources to help meet small business tax obligations.
For more help with Texas taxes, small business owners can reference:
Consult with business tax specialists to leverage credits, incentives and strategic planning.
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