Taxes in Texas: What Every Business Needs to Know

Texas continues to attract entrepreneurs thanks to its business-friendly environment. But to operate legally and efficiently, it’s essential to understand how taxes work in Texas. While there is no state income tax on personal earnings, other taxes apply directly to businesses.

This article breaks down the main taxes in Texas, how they’re calculated, what impact they have on your business, and what exemptions could help reduce your tax burden.

1. What Are “Taxes in Texas”?

"Taxes in Texas" refers to the full range of tax obligations businesses must meet when operating in the state. It’s not just one tax—it includes sales tax, franchise tax, employment taxes, and more.

Unlike many other states, Texas does not levy a state personal income tax, but that doesn’t mean businesses are exempt from taxation. Depending on the company’s size, sector, and location, various tax rules apply.

2. Franchise Tax: A Margin-Based Business Tax

What is it?
The Franchise Tax is a state tax that businesses pay for the privilege of operating in Texas. It is based on gross margins and applies to both corporations and LLCs.

Who pays it?

• Businesses with total revenue above $1.23 million
• Entities formed in Texas or registered to operate in the state

Rates:

• 0% if revenue is below the exemption threshold
• 0.375% for most entities
• 0.75% for specific industries or business types

Calculation methods (you can choose the most favorable):

• Total revenue minus Cost of Goods Sold (COGS)
• Total revenue minus compensation
• 70% of total revenue

This flexibility makes Texas attractive, but it’s still essential to comply with these franchise tax obligations annually.

3. Sales Tax: Required for Taxable Goods and Services

The Sales Tax is another key tax for companies selling taxable goods or services in Texas.

Who is affected?

Any business that sells tangible products, provides taxable services, or distributes goods in Texas—whether in person or online.

Rates:

• 6.25% state rate
• Up to 2% additional local tax
• Maximum total: 8.25% in some jurisdictions

Business requirements:

• Register with the Texas Comptroller
• Collect sales tax on each taxable transaction
• File sales tax returns (monthly, quarterly, or annually, as assigned)

Businesses act as intermediaries, collecting sales tax from customers and remitting it to the state.

4. Other Relevant Taxes in Texas

Employment Taxes

If you have employees, you must handle:

• FUTA: Federal Unemployment Tax
• SUTA: State Unemployment Tax
• Federal income tax withholding on employee wages

Even though Texas doesn’t tax personal income, federal withholdings still apply.

Property Taxes

Businesses owning commercial property, vehicles, or land are subject to property tax. The average effective rate is 1.47%, but this varies by county and district.

Excise Taxes

Certain industries face specific taxes on products like gasoline, tobacco, alcohol, or telecom services. If you operate in these sectors, be sure to include these in your tax planning.

5. Exemptions and Tax Incentives

Texas offers several exemptions and incentives to reduce your tax liability.

Franchise Tax Exemption

If your annual revenue is under $1.23 million, you’re exempt from paying the franchise tax, although you must still file a "No Tax Due" report.

Sales Tax Exemptions

Some goods and services are exempt from sales tax, including:

• Unprepared food
• Prescription drugs
• Medical equipment
• Manufacturing machinery for export purposes

Location-Based Incentives

Texas has economic development zones where businesses may qualify for tax credits, grants, or local sales tax reductions.

6. How to Stay Compliant with Texas Taxes

To avoid penalties and streamline your tax management:

• Keep accurate records of revenue, deductions, and exemptions
• Check local tax rates—they vary by city and county
• Automate tax processes with software that calculates and reports for you
• Consult a local accountant to ensure compliance and optimize your filings

At Openbiz, we help foreign entrepreneurs navigate all aspects of doing business in Texas—so you can focus on growing your company with confidence.

Frequently Asked Questions About Taxes in Texas

Does Texas have a state income tax?
No. Texas does not levy a personal income tax, making it attractive for both residents and business owners.

Does my LLC have to pay Franchise Tax even with no profit?
It depends. If your total revenue exceeds $1.23 million, yes. If not, you must still file the required information report.

What services are exempt from sales tax?
Medical, financial, educational, and legal services are generally exempt, but you should check the official list for your industry.

Do I need to charge sales tax for online sales?
Yes. If you sell to consumers in Texas and exceed certain thresholds, you are required to collect and remit sales tax.

What happens if I don’t file taxes on time?
You may face penalties, interest, and in serious cases, legal enforcement. Failing to remit collected sales tax can even lead to criminal charges.

Conclusion

Understanding taxes in Texas is essential to operating legally and profitably. While the state offers major benefits—like no income tax—it still imposes several business taxes that require attention.

From the Franchise Tax to the Sales Tax, and from employment to local taxes, every element matters.

At Openbiz, we help international business owners handle all aspects of Texas tax compliance. Our expert advisors can guide you through setup, filings, and optimizations tailored to your company.

Ready to take control of your taxes in Texas? Contact us today and let’s get started.

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