Texans are fortunate to live in a state with low business taxes, which helps businesses keep more of what they earn. This is one of the reasons that entrepreneurs favor forming their businesses in Texas, and why the state ranks high in terms of its business environment. However, despite the relatively low tax rates, there are still certain aspects of business taxes that every Texas business must pay and file on time.
There are several types of Texas business taxes, including sales and use taxes. These taxes are levied on taxable goods and services sold in the state. In addition, businesses that operate a retail store in the state must collect and remit these taxes.
Texas Franchise Tax
This replaces a traditional corporate income tax. It applies to most businesses with revenue above $1.23 million. The tax rate varies depending on your business type and revenue:
- 0.375%: Applies to retail and wholesale businesses (specific industry classifications apply).
- 0.75%: Applies to most other businesses.
- Businesses with revenue under $1.23 million pay no franchise tax.
- There are additional tax brackets for businesses exceeding $20 million in revenue.
How to Calculate Texas Franchise Tax?
- The tax is levied on your business’s “margin,” which can be determined in a few ways:
- Total revenue multiplied by 70%
- Total revenue minus cost of goods sold (COGS)
- Total revenue minus compensation paid
- Total revenue minus $1 million (option available since 2014)
The method resulting in the lowest taxable margin is used for tax calculation.
The Texas Comptroller of Public Accounts handles franchise tax filing. You can file online or by mail. Their website offers resources and guides to assist you: https://comptroller.texas.gov/taxes/franchise/
Texas Sales and Use Tax
Texas has a state sales tax rate of 6.25%, and localities can add an additional 2% on top of that, bringing the maximum combined sales tax to 8.25%. Businesses that sell taxable goods and services in Texas must collect and remit this tax.
The Texas Comptroller also handles sales and use tax. You’ll need to register for a sales tax permit and file returns according to their schedule.