How to Pay LLC Taxes in Texas

Thinking about Texas LLC taxes might seem confusing, especially since the state is famous for its lack of personal income tax. While that’s a bonus for individuals, it doesn't mean your business is completely off the hook. This guide clarifies exactly which taxes pertain to your Texas LLC, breaking down your commitments at the federal, state, and local levels.

Federal Income Taxes for Your Texas LLC

First, it's important to understand that the Internal Revenue Service (IRS) doesn't have a specific tax classification just for Limited Liability Companies (LLCs). Instead, the IRS treats an LLC based on its structure—how many members it has and what tax status it elects to use. This "pass-through" nature means the business itself doesn't pay income tax; profits and losses are passed to the owners, who then report them on their personal tax returns.

Single-Member LLCs (Default Status: Disregarded Entity)

If you're the sole owner of your LLC, the IRS automatically treats it as a "disregarded entity." Think of it as an extension of you, the owner. This is the simplest structure for tax purposes. You'll report all business income and expenses on Schedule C (Profit or Loss from Business), which you attach to your personal Form 1040. The net profit from your Schedule C is then subject to both income tax and self-employment taxes (Social Security and Medicare), which currently sit at a combined rate of 15.3%.

Since your taxes aren’t withheld from a paycheck, you are expected to pay taxes throughout the year using quarterly estimated tax payments. These are calculated using Form 1040-ES, Estimated Tax for Individuals, and are typically due on April 15, June 15, September 15, and January 15 of the following year.

Multi-Member LLCs (Default Status: Partnership)

When an LLC has two or more owners (members), the IRS default classification is a partnership. A multi-member LLC must file a separate informational return each year: Form 1065, U.S. Return of Partnership Income. This form reports the company's total income, deductions, gains, and losses.

However, the LLC itself does not pay taxes on this income. Instead, it issues a Schedule K-1 to each member. The K-1 shows each member’s proportional share of the business's profits or losses, which they then report on their personal Form 1040. Just like sole proprietors, members of a partnership are responsible for paying income and self-employment taxes on their share of the earnings and typically need to make quarterly estimated tax payments.

LLCs Electing S Corp or C Corp Status

Your LLC has the flexibility to ask the IRS to treat it as a different type of business entity for tax purposes. This is done by filing a formal election.

• S Corporation Election: Many LLCs elect to be taxed as an S Corp by filing Form 2553. Under this structure, profits and losses are still passed through to the owners. The main advantage is a potential reduction in self-employment taxes. Owners who work in the business must be paid a "reasonable salary," which is subject to FICA payroll taxes (Social Security and Medicare). Any remaining profits can be distributed to owners as dividends, which are not subject to self-employment taxes. The LLC files Form 1120-S, and each shareholder receives a Schedule K-1 detailing their share of profits.
• C Corporation Election: Though less common for small businesses, an LLC can also elect to be taxed as a C Corporation by filing Form 8832. This structure is not a pass-through entity. The corporation files its own tax return (Form 1120) and pays corporate income tax directly. If profits are then distributed to owners as dividends, the owners are taxed again at their personal tax rate. This creates what's known as "double taxation." This structure is generally reserved for companies that plan to retain and reinvest substantial profits or seek venture capital funding.

The Primary State Tax: Texas Franchise Tax

While Texas doesn't have a state income tax on businesses, most LLCs are subject to the Texas Franchise Tax, which is administered by the Texas Comptroller of Public Accounts. This is a tax on a business's "margin," not its profit or revenue, and it can trip up many new business owners.

Who Must File a Franchise Tax Report?

Every "taxable entity" formed in or doing business in Texas must file a franchise tax report each year. This includes LLCs, S Corps, C Corps, partnerships (except general partnerships owned solely by natural persons), and other legal entities. In short, your Texas LLC must file.

The "No Tax Due" Threshold: A Critical Point

Here's a key relief provision: if your LLC's annualized total revenue is below a certain threshold, you do not owe any franchise tax. As of the 2024 report year, this "No Tax Due Threshold" is $2.47 million. This amount is adjusted for inflation, so always check the Comptroller's website for the current year's figure.

Even if your revenue is below this threshold, you are still required to file a report. You cannot simply ignore the filing requirement. You must file a No Tax Due Report (Form 05-163) or use the simplified EZ Computation Report to inform the state that you meet the threshold and owe nothing. Failure to file can result in penalties and loss of your LLC's good standing with the state.

How the Franchise Tax Margin is Calculated

If your annualized revenue exceeds the No Tax Due Threshold, you must calculate your taxable margin. You can determine your margin using one of these four methods (you can choose whichever results in the lowest tax amount):

• Total revenue minus Cost of Goods Sold (COGS)
• Total revenue minus Compensation
• 70% of total revenue
• Total revenue minus $1 million

After calculating your margin, you apply the appropriate tax rate. For the 2024 report year, the rates are:

• 0.375% for businesses primarily engaged in retail or wholesale trades.
• 0.75% for all other taxable entities.

Filing and Paying the Franchise Tax

Your Texas Franchise Tax report is due annually on May 15th. If May 15th falls on a weekend or holiday, the due date is moved to the next business day. You can file all reports online through the Comptroller's WebFile system. Filing online is fast, secure, and ensures you receive an immediate confirmation of your submission.

Other Common Texas Taxes for LLCs

Beyond federal income and state franchise taxes, your LLC may be responsible for other taxes depending on its industry and operations.

Sales and Use Tax

If your LLC sells taxable tangible goods (like a retail store), or provides taxable services (like data processing or non-residential repair services), you must obtain a Texas Sales and Use Tax Permit. With this permit, you are responsible for collecting sales tax from your customers at the point of sale and remitting it to the Texas Comptroller. Filing frequency (monthly, quarterly, or annually) depends on the amount of tax you collect.

Payroll Taxes

If your LLC has employees, you become responsible for payroll taxes. This includes:

• Federal Payroll Taxes: You must withhold federal income tax, Social Security, and Medicare taxes from employee paychecks. You, the employer, also pay a matching portion of Social Security and Medicare (together known as FICA). Additionally, you are responsible for FUTA (Federal Unemployment Tax Act) taxes.
• Texas Unemployment Tax: You must pay state unemployment insurance (SUI) taxes to the Texas Workforce Commission (TWC). The rate for new employers is typically set by industry, and after a period, your rate will be based on your company's claims history.

Local Property Taxes

If your LLC owns any real estate (like an office building or warehouse) or significant business personal property (like machinery, equipment, or vehicles), it will be subject to property taxes levied by local taxing units, such as counties, cities, and school districts.

Final Thoughts

Paying taxes for your Texas LLC involves managing obligations across federal, state, and sometimes local jurisdictions. Keep federal tax status in mind for pass-through income, stay on top of the annual Texas Franchise Tax filing regardless of revenue, and be ready for sales or payroll taxes if your business activities require them.

Meeting all these tax responsibilities means staying informed on everything from self-employment tax rules to calculating the franchise tax margin. For tough questions that require instant, audit-ready answers from authoritative sources like the IRC and Texas tax code, Feather AI streamlines your research, so your focus can stay on guiding clients and growing your business.