Complete Guide to Texas LLC Taxes in 2025
Texas is one of the most popular states in America for forming an LLC, and for good reason. The Lone Star State imposes no personal income tax whatsoever, making it an extremely attractive destination for business owners seeking to minimize their state tax burden. However, Texas does have a unique franchise tax system -- called the margin tax -- that applies to businesses above a certain revenue threshold. This comprehensive guide explains every tax obligation a Texas LLC owner faces in 2025, from formation through ongoing compliance.
How Texas Taxes LLCs: The No Income Tax Advantage
Texas is one of only nine US states with no personal income tax. This means that LLC members pay zero state income tax on their pass-through business income. There is no state equivalent to the federal Form 1040 for individual income. Your LLC profits flow through to you as a member, and Texas simply does not tax that income at the individual level.
This creates a significant tax advantage over states like California (up to 13.3% income tax plus an $800 LLC fee), New York (up to 10.9%), or New Jersey (up to 10.75%). For an LLC member earning $200,000 in net income, the difference between operating in Texas versus California could easily exceed $20,000 annually in state taxes alone.
However, the absence of an income tax does not mean Texas LLCs are completely free from state-level taxation. Texas imposes a franchise tax (officially called the Texas Margin Tax) on most business entities, which functions as a form of gross receipts tax rather than a traditional income tax.
Key Point: Texas has no state income tax, but it does have a franchise/margin tax that applies to businesses with total revenue above $1.23 million. Most small LLCs fall below this threshold and owe $0 in state business taxes -- making Texas one of the most tax-friendly states for small business owners.
The Texas Franchise Tax (Margin Tax) Explained
The Texas franchise tax is a privilege tax imposed on each taxable entity formed or organized in Texas, or doing business in Texas. Despite its name, this is not a "franchise" in the commercial sense -- it is essentially a tax on the privilege of doing business in the state.
The franchise tax is calculated on the entity's taxable margin, which is the lower of: (1) total revenue times 70%, (2) total revenue minus cost of goods sold (COGS), (3) total revenue minus compensation, or (4) total revenue minus $1 million. The entity selects the method that produces the lowest margin, thereby minimizing the tax.
For most businesses, the standard franchise tax rate is 0.75% of taxable margin. Qualifying wholesale and retail businesses benefit from a reduced rate of 0.375%. Businesses with total revenue up to $20 million may elect to use the E-Z Computation method at a rate of 0.331% of total revenue, which simplifies the calculation considerably.
Franchise Tax Rates and Thresholds
| Revenue Level | Tax Rate | Notes |
|---|---|---|
| $0 - $1,230,000 | 0% (No Tax Due) | File No Tax Due Report only |
| $1,230,001 - $20,000,000 | 0.331% (E-Z Rate) | Optional simplified calculation |
| Wholesale/Retail over $1.23M | 0.375% | Reduced rate for qualifying businesses |
| All Other over $1.23M | 0.75% | Standard rate for most businesses |
Additionally, any entity whose calculated franchise tax is $1,000 or less after applicable credits is not required to pay the tax (though they must still file). This provides further relief for smaller businesses that barely exceed the $1.23M revenue threshold.
Texas Franchise Tax Filing Requirements
All Texas LLCs must file a franchise tax report annually with the Texas Comptroller of Public Accounts. The filing deadline is May 15 of each year. An automatic extension to November 15 is available upon written request if the entity has no outstanding tax liability.
Even LLCs with revenue below the $1.23M no-tax-due threshold must file. They submit:
- No Tax Due Report (Form 05-163): Certifies that total revenue is at or below the no-tax-due threshold
- Public Information Report (Form 05-102) or Ownership Information Report (Form 05-167): Provides ownership and officer information to the state
Failure to file can result in forfeiture of the LLC's right to transact business in Texas -- a serious consequence that effectively prevents the LLC from entering into contracts, filing lawsuits, or conducting normal operations.
Tax Tip: Even though Texas has no income tax, LLC owners still owe federal self-employment tax and federal income tax. If your net profit exceeds $50,000-$60,000, consider S-Corporation election to reduce SE tax. Use our S-Corp Tax Calculator to compare savings.
Federal Taxes for Texas LLC Owners
While Texas provides a state income tax break, federal taxes still apply in full. As a Texas LLC owner, your federal obligations include:
- Self-Employment Tax (15.3%): Calculated on 92.35% of net self-employment income. This breaks down to 12.4% for Social Security (on income up to the $176,100 wage base in 2025) and 2.9% for Medicare on all earnings. An additional 0.9% Medicare surtax applies to earnings exceeding $200,000 (single) or $250,000 (married filing jointly).
- Federal Income Tax (10%-37%): LLC pass-through income is combined with any other income and taxed at the applicable marginal federal bracket rate.
- Qualified Business Income (QBI) Deduction: Under IRC Section 199A, eligible LLC owners can deduct up to 20% of qualified business income. Phase-outs begin at $191,950 (single) and $383,900 (MFJ) for specified service trades or businesses.
Texas Sales Tax for LLCs
Texas imposes a 6.25% state sales tax on the sale of taxable goods and certain services. Local taxing jurisdictions can impose additional sales tax of up to 2%, bringing the maximum combined rate to 8.25%.
If your LLC sells taxable tangible personal property or taxable services, you must obtain a sales tax permit from the Texas Comptroller before collecting tax. Sales tax must be collected from customers and remitted to the state on a monthly, quarterly, or annual basis depending on your tax liability volume.
Certain items and services are exempt from Texas sales tax, including groceries (unprepared food), prescription medications, and most professional and personal services. Manufacturing equipment may qualify for partial exemptions as well.
Texas LLC Formation Costs
- Certificate of Formation (Form 205): $300 filing fee with the Texas Secretary of State
- Registered Agent: Required; can be a member, employee, or commercial agent ($0-$150/year)
- Operating Agreement: Not legally required but strongly recommended ($0-$500)
- EIN (Federal Tax ID): Free from the IRS
- Assumed Name Certificate (DBA): $25-$50 per county if applicable
Texas vs. Other No-Income-Tax States for LLCs
| State | Income Tax | Annual Fee | Business Tax |
|---|---|---|---|
| Texas | None | $0 (franchise report only) | Franchise tax 0.375-0.75% above $1.23M |
| Wyoming | None | $60 minimum | None |
| Florida | None | $138.75 | 5.5% corporate (C-corps only) |
| Nevada | None | $350 + $200 license | Commerce tax on revenue over $4M |
| South Dakota | None | $50 | None |
| Washington | None | $60 | B&O tax 0.138-3.3% on gross receipts |
Texas Property Tax Considerations for LLCs
One important factor to consider is that Texas has some of the highest property tax rates in the nation, averaging around 1.60-1.80% of assessed property value. This is how Texas compensates for the lack of a state income tax. If your LLC owns real property, commercial space, or significant tangible business personal property, the property tax burden can be substantial.
Texas is unique in that it taxes not only real property but also business personal property (BPP), including equipment, inventory, furniture, fixtures, and vehicles used in business. LLCs must file an annual rendition with the county appraisal district, typically by April 15 each year.
Pass-Through Entity Tax (PTET) -- Texas Does Not Have One
Unlike many other states, Texas does not offer a Pass-Through Entity Tax (PTET) election because there is no individual income tax to work around. The PTET concept was designed to help business owners in income-tax states bypass the federal $10,000 SALT deduction cap. Since Texas does not have a personal income tax, there is no SALT issue for income purposes. However, Texas property taxes do count toward the SALT cap.
Estimated Tax Payments
Since Texas has no state income tax, there are no state estimated tax payments required. However, Texas LLC owners must still make federal estimated tax payments if they expect to owe $1,000 or more in federal tax after credits and withholding. Federal estimated payments are due quarterly: April 15, June 15, September 15, and January 15.
Texas LLC Filing Deadlines
| Filing Type | Deadline | Extension |
|---|---|---|
| Franchise Tax Report | May 15 | Yes, to November 15 |
| Federal Single-Member LLC | April 15 | Yes, to October 15 |
| Federal Multi-Member LLC (1065) | March 15 | Yes, to September 15 |
| Federal Estimated Payments | Apr 15, Jun 15, Sep 15, Jan 15 | No |
| Property Tax Rendition | April 15 | Yes, to May 15 |
Common Texas LLC Tax Mistakes
- Failing to file the franchise tax report: Even if you owe $0, you must still file. Not filing leads to forfeiture of your LLC's right to do business.
- Not rendering business personal property: Many LLC owners are unaware that Texas taxes BPP. Failing to file a rendition triggers a 10% penalty.
- Assuming no state tax means no state filing: Texas requires franchise tax reports, sales tax returns, and property tax renditions.
- Ignoring federal estimated tax payments: Without state withholding, the entire federal tax burden falls on estimated payments.
- Not evaluating S-Corp election: The SE tax savings from S-Corp status can be substantial in Texas since there is no additional state-level tax on S-Corps.
- Miscalculating the franchise tax margin: Choosing the wrong method or incorrectly calculating COGS or compensation deductions can result in overpayment or penalties.
Texas LLC Tax Deductions
Since Texas has no income tax, state-level deductions are not applicable. Federal deductions remain critically important:
- Home Office Deduction: Simplified ($5/sq ft, up to 300 sq ft) or actual expense method
- Vehicle Expenses: 70 cents per mile for 2025, or actual expenses
- Health Insurance Premiums: Self-employed health insurance is deductible above-the-line
- Retirement Contributions: SEP-IRA (up to 25%, max $69,000) or Solo 401(k)
- Section 179 Expensing: Up to $1,250,000 in qualifying equipment in 2025
- QBI Deduction: 20% of qualified business income can reduce your federal tax bill
Texas Advantage: Since Texas has no income tax, the full value of your federal deductions flows directly to reduced federal taxes without any state "clawback." In states with income tax, some federal deductions may not be recognized at the state level, but this is not an issue in Texas.
Dissolving a Texas LLC
If you need to close your Texas LLC, file a Certificate of Termination (Form 651) with the Texas Secretary of State ($40 filing fee). Before filing, you must obtain a Certificate of Account Status (tax clearance) from the Texas Comptroller confirming all franchise tax obligations have been met. File final federal tax returns, close your sales tax permit if applicable, and settle all debts before distributing remaining assets to members.