Doing Business in Texas: A Guide to Corporate and Personal Income Taxes

Doing business in Texas can be a great opportunity for entrepreneurs and companies alike. With no corporate income tax and no personal income tax, the Lone Star State offers a competitive advantage over many other states. However, there are still taxes that businesses must pay, such as the franchise tax, sales tax, and withholding taxes. This article will provide an overview of the different taxes that businesses in Texas must pay, as well as the rules and exemptions that apply. Currently, six states in Nevada, Ohio, South Dakota, Texas, Washington and Wyoming do not have a corporate income tax.

However, four of those states of Nevada, Ohio, Texas and Washington do have some form of gross corporate income tax. In addition, five of those states Nevada, South Dakota, Texas, Washington and Wyoming, as well as Alaska, Florida and Tennessee, currently have no personal income taxes. People in New Hampshire only pay income taxes for interest and dividends. Compared to most states, business taxes are extremely low in Texas and there is no personal income tax.

This gives Texas two distinct competitive advantages over many other states: companies are left with more money than they earn and can recruit top talent by citing the lack of personal income taxes. In most states, LLCs are entities that protect business owners from certain legal liabilities, but transfer their income to those owners, who pay personal income tax instead of corporate income tax on their profits. In addition, if your company was formed or is located in another state but generates income in Texas, it may be subject to Texas taxes. For these filers, the franchise tax due is by multiplying the total income by the distribution factor and then multiplying the total income prorated by a tax rate of 0.331%. Failure to do so may result in your LLC losing the right to do business in Texas and you may have to pay a penalty to reinstate it.

A corporate franchise tax is essentially a charge that a company must pay for the privilege of doing business in a city or state. A single-rate system minimizes the incentive for businesses to engage in economically wasteful tax planning to mitigate the damage of the higher marginal tax rates that some states charge as taxable revenues increase. Most Texas small businesses that are de facto corporations pay franchise tax, while sole proprietorships don't. You will withhold 7.65 percent of your taxable wage and your employees will also be responsible for 7.65 percent, adding to the current federal tax rate of 15.3 percent. See Franchise Tax Rule 3,586 for a list of some activities that are considered “doing business in Texas”.In most states, corporations are subject to corporate income tax, while income from transfer entities such as S corporations, limited liability companies (LLCs), corporations and sole proprietorships is subject to state personal income tax.

However, if you are doing business in multiple states you should be aware that your company could be considered to have a link to those states and you may be required to pay taxes in those states. Texas has a state sales tax rate of 6.25 percent, a maximum local sales tax rate of 2.00 percent and a combined average state and local sales tax rate of 8.20 percent. For Texas business owners considering forming a partnership a qualified tax accountant can help determine how to structure the partnership to obtain the most favorable tax treatment based on individual circumstances. It provides many of the benefits of the constitution but unlike Corporation C it is not subject to a separate federal income tax or in most states a separate state income tax. While Texas does recognize Federal Election S S corporations are subject to state franchise tax. The State Administrative Code Title 34 Part 1 Chapter 3 Subchapter O contains an extensive list of Texas sales tax rules and exemptions applicable to numerous organizations services and products.