Texas LLC Taxes Explained: Small Business Essentials

Introduction

Forming a Limited Liability Company (LLC) in Texas offers small business owners flexibility, limited liability protection, and potential tax advantages.
While Texas does not impose a personal income tax, LLCs are still subject to state franchise tax, sales tax, and federal tax obligations depending on their structure.
This guide explains how Texas LLC taxes work in 2025, what returns you must file, and how to minimize liability through smart planning.

Step 1: How Texas LLCs Are Taxed

By default, a Texas LLC is considered a pass-through entity, meaning profits are passed directly to the owners (members) and taxed at the federal level, not the state level.
Texas, however, imposes a franchise tax on most business entities, including LLCs, based on annual revenue.

Example:
If your LLC earns $1.8 million in total revenue for 2025, you are below the Texas no-tax-due threshold of $2.47 million and owe no franchise tax though you must still file a “No Tax Due” report with the Texas Comptroller.

Step 2: Federal Tax Treatment of a Texas LLC

For federal tax purposes, the IRS allows several classifications based on the number of members:

Key Tip:
You can elect S-Corporation status using Form 2553 if your LLC meets eligibility requirements potentially saving on self-employment taxes.

Step 3: Texas Franchise Tax Explained

All taxable entities in Texas, including LLCs, must file a franchise tax report annually.
This tax is based on margin, which is the lowest of the following four calculations:

1. Total Revenue × 70%
2. Total Revenue – Cost of Goods Sold (COGS)
3. Total Revenue – Compensation
4. Total Revenue – $1 million

The franchise tax rate for 2025 remains:

• 0.375% for retail and wholesale businesses
• 0.75% for all other businesses

Example:
If your consulting LLC has $3 million in revenue and $1 million in expenses, your margin is $2 million.
At 0.75%, your Texas franchise tax liability would be $15,000.

Step 4: Texas Sales and Use Tax for LLCs

If your LLC sells taxable goods or services, you must collect and remit sales tax to the Texas Comptroller.

• State Rate: 6.25%
• Local Add-on: Up to 2% (total maximum 8.25%)
• File returns monthly, quarterly, or annually based on sales volume

Example:
An e-commerce LLC selling $100,000 in taxable items at an 8.25% combined rate must collect and remit $8,250 in sales tax to the state.

Step 5: Employment and Payroll Taxes

If your LLC has employees, you must:

1. Withhold federal income tax, Social Security, and Medicare.
2. File Form 941 quarterly and Form 940 annually with the IRS.
3. Register with the Texas Workforce Commission (TWC) for unemployment tax.
4. Issue Form W-2 to employees and Form 1099-NEC to contractors.

Example:
If your LLC pays $150,000 in total wages, you’ll remit about $11,475 in Social Security and $2,175 in Medicare taxes for the employer portion.

Step 6: Local and Property Tax Considerations

Texas counties and municipalities may assess property tax on tangible business property such as:

• Office furniture
• Equipment
• Computers and machinery
  Businesses must file a Rendition Statement (Form 50-144) with their local appraisal district, typically by April 15 each year.

Step 7: Annual Filings Required for Texas LLCs

Missing deadlines can trigger penalties of up to 10% of tax due plus interest.

Step 8: How to Reduce Texas LLC Tax Liability

1. Elect S-Corp Status:
   Save self-employment taxes by paying yourself a reasonable salary and taking remaining profits as distributions.
2. Claim Federal Deductions:
   Deduct home office, travel, depreciation (§179), and health insurance.
3. Track Business Expenses:
   Use accounting software to categorize deductible expenses properly.
4. Claim R&D or Energy Incentives:
   Qualify for Texas Franchise Tax credits for R&D or renewable energy investments.

Example:
A tech startup LLC claiming $400,000 in qualified research expenses could reduce its franchise tax under the Texas R&D credit program.

Conclusion

A Texas LLC provides flexibility, liability protection, and favorable tax treatment.
While the state offers no personal income tax, LLCs must still comply with franchise, sales, and federal tax rules.
By planning entity structure, filing correctly, and leveraging credits, business owners can minimize taxes while staying fully compliant in 2025.

Call to Action

For professional help understanding your Texas LLC taxes, optimizing entity structure, or preparing franchise tax filings, contact Anshul Goyal, CPA EA FCA, a U.S.-licensed Certified Public Accountant, Enrolled Agent authorized to practice before the IRS, and cross-border tax expert assisting Texas business owners with compliance and strategic tax savings.

Disclaimer

This content is for informational purposes only and should not be considered tax or legal advice. Consult a qualified CPA before making entity or filing decisions.

Top 5 FAQs

1. Does a Texas LLC pay state income tax?
   No. Texas does not have a personal income tax, but LLCs may owe franchise tax.
2. What is the franchise tax threshold in 2025?
   Entities with revenue under $2.47 million owe no franchise tax but must still file a report.
3. Do single-member LLCs need to file separate returns?
   No. They report income on Schedule C of the owner’s federal return.
4. Is an S-Corp election beneficial for a Texas LLC?
   Yes, it can reduce self-employment taxes if properly structured.
5. Do LLCs in Texas pay property tax?
   Yes, on business assets such as furniture and equipment, assessed by local appraisal districts.

About Our CPA

Anshul Goyal, CPA EA FCA is a Certified Public Accountant licensed in the United States, Enrolled Agent authorized to practice before the IRS, and a cross-border tax expert helping Texas business owners manage LLC compliance, franchise filings, and IRS reporting efficiently.