Choosing between an LLC and an S-Corporation in Texas? While both can limit liability and offer pass-through taxation, they differ greatly in how the Texas Franchise Tax (margin tax) and federal payroll taxes apply. Here’s how to decide what’s best for your business in 2025.
LLC vs S-Corp: Federal Classification
At the federal level:
- A Single-Member LLC is a disregarded entity by default (files as Schedule C on Form 1040).
- A Multi-Member LLC is taxed as a partnership (Form 1065).
- An LLC may elect to be taxed as an S-Corp by filing Form 2553.
An S-Corp is not a business structure but a tax election under IRC §1362, providing pass-through taxation with potential self-employment tax savings by paying a “reasonable salary” to owners.
Texas Margin Tax: Key Differences
Texas imposes a Franchise (Margin) Tax on entities that do business in the state. Here’s how it differs by entity:
| Entity Type | Tax Base | Rate (2025) | Form |
|---|---|---|---|
| LLC (default or partnership) | Total Revenue minus COGS or Compensation | 0.375% (retail/wholesale), 0.75% (others) | Form 05-158-A |
| S-Corp | Same as above | Same as above | Form 05-158-A |
| No Tax Due Threshold | Revenue under $2.47 million | 0% | Form 05-163 (EZ) or No Tax Due Report |
Note: There is no difference in how an LLC or an S-Corp is treated for Texas Franchise Tax purposes. The distinction lies in federal employment tax treatment.
Federal Payroll Tax: Major Difference
Here’s where the S-Corp election creates savings:
- LLC owners pay self-employment tax (15.3%) on all business income.
- S-Corp shareholders pay FICA tax only on reasonable compensation (W-2 wages). Distributions beyond salary are not subject to self-employment tax.
Example:
Total net income: $120,000
- LLC (sole prop): All $120,000 subject to SE tax
- S-Corp: Pays owner $60,000 salary (subject to payroll tax), rest $60,000 taken as distributions (not subject to payroll tax)
This can result in over $9,000 in SE tax savings, subject to IRS scrutiny.
Forms to File
Federal:
- Form 1040 with Schedule C (for LLCs)
- Form 1120S (S-Corp return)
- Form 941 and W-2/W-3 (Payroll filings for S-Corps)
- Form 2553 (S-Corp election)
- Form 940 (Federal unemployment tax)
Texas:
- Form 05-158-A (Franchise Tax Long Form)
- Form 05-163 (EZ Computation)
- Form 05-102 (Public Information Report)
Step-by-Step: Which Entity Is Best for You?
- Assess Revenue: If under $2.47 million in gross receipts, you may owe no franchise tax, regardless of structure.
- Estimate Payroll vs Distribution Needs: Use an S-Corp if you want to split income between salary and distributions.
- Run Payroll: S-Corps must file payroll reports and issue W-2s. LLCs don’t need payroll unless they have employees.
- Consider IRS Audit Risk: Paying too low a salary in an S-Corp may trigger IRS audits.
- File Form 2553 timely to elect S-Corp treatment.
Conclusion
For Texas businesses, the margin tax treatment is the same for LLCs and S-Corps. However, federal payroll tax rules vary sharply. An S-Corp can offer thousands in tax savings if run correctly. The right choice depends on your profit level, administrative capacity, and IRS compliance posture.
Call to Action
Schedule a strategy session with Anshul Goyal, CPA, EA, FCA to determine whether your Texas business should remain an LLC or elect S-Corp status. Proper structuring can legally reduce taxes and increase after-tax income.
Disclaimer:
Anshul Goyal, CPA, EA, FCA is a U.S.-licensed Certified Public Accountant and IRS Enrolled Agent with extensive experience advising Texas LLCs, S-Corps, and startup founders. This blog provides educational insights and does not constitute legal or tax advice. Choosing between an LLC and S-Corp should involve professional guidance considering IRS rules, Texas franchise tax law, and payroll compliance requirements.
Top 5 High-Searched FAQs
1.Do S-Corps pay franchise tax in Texas?
Yes, all entities, including S-Corps, are subject to Texas Franchise Tax if they cross the revenue threshold.
2. Is it better to be an LLC or S-Corp in Texas?
It depends. S-Corps can offer payroll tax savings, but they require more compliance.
3. What’s the revenue limit to avoid franchise tax in Texas?
Entities with total revenue under $2.47 million in 2025 may file a No Tax Due Report.
4. Can a Single-Member LLC be an S-Corp?
Yes. File Form 2553 to elect S-Corp taxation for your LLC.
5. What happens if I don’t pay myself a salary in an S-Corp?
The IRS may reclassify distributions as wages and impose penalties for underpayment of employment taxes.
About Our CPA
Anshul Goyal, CPA, EA, FCA is a U.S.-licensed Certified Public Accountant and IRS-authorized Enrolled Agent. He advises businesses across Texas and nationwide on entity selection, S-Corp compliance, and payroll tax optimization. With cross-border expertise, he also supports Indian founders and international clients doing business in the U.S.