Taxes for a Texas LLC
Note: Our tax lesson is not as step-by-step as our other lessons, due to the uniqueness and variation among LLCs. Taxes are not as straightforward as forming an LLC in Texas (things vary by city and vary by industry), and therefore, the information below is an overview, and not a comprehensive guide.
We recommend speaking with a few accountants in Texas to make sure you meet all your federal, state, and local tax obligations. For tips on finding an accountant for your LLC, please see how to find an accountant.
Taxes are paid on 3 levels:
Federal income taxes for your LLC
Federal taxes are filed with the IRS.
Most LLCs in Texas with default tax elections are “tax-reporting” entities with the IRS and not “tax-paying” entities. Meaning, the LLC doesn’t file its own tax return with the IRS, but rather the profits and losses flow-through to the owners and the owners are responsible for filing them on their personal income tax return.
(related article: tax-reporting entity vs tax-paying entity)
By default, the IRS will tax your LLC based on the number of LLC Members (owners).
A Texas LLC with 1 Member is taxed as a Disregarded Entity:
- If the LLC owner is an individual, the LLC is taxed like a Sole Proprietorship
- If the LLC owner is another company, the LLC is taxed like a branch/division of the parent company
In LLC/Sole Proprietorship taxation, the LLC doesn’t file its own federal return, but rather, the LLC owner reports and pays the taxes via their personal income tax return (Form 1040). The profits and losses from the business will likely be reported on a Schedule C. You may also need to include additional Schedules and Forms, depending on how the income is derived.
A Texas LLC with 2 or more Members is taxed as a Partnership.
In LLC/Partnership taxation, the LLC is a tax-reporting entity and has to file its own federal informational return (Form 1065) and issue K-1s to each Member (reporting their share of the profits). The K-1 is then attached to the owner’s personal income tax return (Form 1040).
The above types of taxation are referred to as the “default” tax elections. You don’t have to do anything to “get them”. When you apply for an LLC EIN, you tell the IRS how many Members your LLC has and that’s how they know what type of tax return to expect.
Also: Because Texas is a community-property state, husband and wife LLCs can also elect to be taxed as a Sole Proprietorship instead of a Partnership. For more information, please see Qualified Joint Venture LLC.
Keep in mind that your LLC is still a separate legal entity from its owners. Just because the IRS taxes your LLC like a Sole Proprietorship or like a Partnership doesn’t mean your LLC is a Sole Proprietorship or a Partnership. No matter how the IRS taxes your LLC, your personal assets are still protected.
Besides the “default” tax elections, you can request that the IRS tax your LLC like a Corporation instead.
There are two types of corporate taxation for LLCs:
- LLC taxed as C-Corporation
- LLC taxed as S-Corporation
In LLC/C-Corp taxation, the LLC is treated like a C-Corporation for federal tax purposes. This is not a very common election though, because an LLC/C-Corp faces double taxation. This election usually only makes sense for larger companies that are looking to raise money, go public, or have large healthcare expenses. You can find more information here: LLC taxed as a C-Corp.
In LLC/S-Corp taxation, the LLC is treated like an S-Corporation for federal tax purposes. This is a popular election for saving money on self-employment taxes. It usually makes sense once the LLC’s net income is around $70,000 per year. This is usually not a good idea for businesses that are just starting out and haven’t generated a lot of profit yet. You can find more information here: LLC taxed as an S-Corp.
No State Income Tax in Texas
Good news, Texas doesn’t have a personal state income tax.
All Texas LLCs must file franchise tax reports every year. They are due by May 15th. The first reports are not due until the year after your LLC was formed.
Most small businesses don’t actually pay any tax, but still have to file what’s called a “No Tax Due Report”. Along with that, you’ll also need to file a Public Information Report, sometimes abbreviated as a PIR.
We have a whole page about this: how to register for franchise tax, the penalties if you don’t file, who has to pay, and more. You can find that here: franchise tax for a Texas LLC.
Sales and Use Tax
Your Texas LLC is responsible for collecting sales tax if it:
- sells or leases tangible personal property in Texas
- or sells taxable services in Texas
The base sales tax in Texas is 6.25%, however, most cities charge an additional sales tax on top of that.
You can register your Texas LLC for sales tax via WebFile. And if you need a sales tax resale certificate, you can download the form from the Texas Comptroller’s website.
We’ve written about the above and Texas sales tax in more depth on this page: Texas LLC business licenses and permits. Just scroll down to the “Sales Tax” section.
Other State Taxes
The Texas Comptroller of Public Accounts is the agency which collects taxes and pays for public services in the state. The Comptroller collects around 60 different taxes for more than 1,400 counties, cities, and other local governments.
Besides franchise tax and sales tax, some small business owners may be responsible for other taxes. Some examples are:
- battery sales tax
- coin-operated machines tax
- crude oil tax
- mixed beverages tax
- natural gas tax
- tobacco tax
- and more (see all taxes and fees)
Again, we recommend working with an accountant so you can dive into the details of your business.
Besides taxes paid at the state-level, your Texas LLC may have tax filings with your local municipality. This will depend on how your LLC makes money and where it’s located.
Questions? Texas Comptroller Contact Info
Their hours are Monday through Friday, from 8am to 5pm Central Time.
Texas Comptroller: taxes
Texas Comptroller: FAQs on taxes
Texas Comptroller: tax forms
Texas Comptroller: a field guide to the taxes of Texas
Texas Comptroller: tax publications
Texas Comptroller: FAQs on local sales and use tax
Texas Comptroller: video library
Texas Comptroller: tax payment deadlines
Texas Comptroller: history of state taxes and fees