How To File LLC Taxes In Texas? (Simple Guide)
Navigating the complexities of taxes for your Texas LLC may seem daunting, but understanding the various tax classifications and requirements is crucial to ensuring compliance and managing your financial obligations.
To provide accurate and up-to-date information, we consulted with our team of LLC specialists with over 15 years of experience in the business sector, including extensive experience in taxing.
We gathered all the updated tax information you need about Texas LLC Taxation in this article.
Quick Summary
- Texas LLCs are subject to federal and state taxes, such as the Texas Franchise Tax.
- Single-member limited liability companies (LLCs) are taxed as sole proprietorships, meaning that the owner of the LLC reports all income and expenses on their tax return.
- LLC owners have access to deductions and expenses, which can reduce their overall tax liability.
How Are LLCs Taxed in Texas?
LLCs in Texas are taxed in various ways based on the chosen tax classification. By default, most LLCs are treated as pass-through entities, meaning the business does not pay federal income taxes.
Instead, the profits and losses are passed to the owners, who report them on their tax returns. This approach makes taxation simpler and eliminates double taxation.
Texas LLCs only need to pay federal income tax, as Texas is one of the few states with no corporate or individual income tax [1].
Sole proprietorships benefit from favorable tax treatment due to the absence of state taxes, while partnerships may incur franchise tax but can be structured to maximize tax benefits.
State Taxes for Texas LLCs
Texas LLCs may be subject to several state taxes, depending on their type and chosen tax classification. In Texas, an LLC is subject to sales tax and the Texas franchise tax, which requires filing an annual franchise tax report.
Even if no tax is due, LLCs must still file these reports and may need to pay franchise tax based on revenue thresholds.
1. Single-Member LLC
Single-member LLCs in Texas are disregarded entities for federal income tax purposes. As the owner of a single-member LLC, you are responsible for filing and paying federal income taxes to the Internal Revenue Service.
The LLC's income and expenses are reported on the owner's personal tax return. This process, known as LLC pass-through taxation, avoids the double taxation that corporations face. This Texas LLC falls under the federal self-employment tax.
This is because the federal self-employment tax is not based on the type of entity you form but on whether you are considered self-employed.
In other words, single-member LLCs are taxed as a sole proprietorship, with the owner reporting income and expenses on their personal tax return.
2. Multi-Member LLC
For multi-member LLCs in Texas, the default tax classification is as a partnership. This means that:
- Multi-member LLCs are required to file a partnership return
- Profits are allocated to members
- Members must report their share of the profits on their tax returns.
By understanding and adhering to these tax requirements, multi-member LLCs can ensure compliance and proper distribution of profits among members.
3. LLCs Taxed as S-corp
Electing S-corp taxation for your LLC in Texas can offer potential benefits, such as pass-through taxation and non-SE taxed distributions.
To request S-corp taxation, you must submit Form 2553 to the IRS.
However, this tax election may not be suitable for every business, and it is advisable to consult a CPA before making this decision. S-corp taxation may benefit businesses with established profits, as it can provide savings on self-employment taxes.
Additionally, S-corps must file their income with the IRS annually using Form 1120-S [2].
4. LLCs Taxed as C-corp
While less common for LLCs, electing C-corp taxation status involves the LLC being treated as a separate entity, subject to corporate taxation. LLCs can be taxed as C corporations.
C-corp taxation offers a wider range of deductions and credits but comes with more complexity and the requirement to file an Annual Franchise Tax Return. To request C-corp taxation, you must submit Form 8832 to the IRS.
C corporations are subject to federal corporate income tax at a rate of 21%. However, Texas does not have a state corporate income tax [3].
C corporations are also eligible for a wider range of tax deductions and credits than regular LLCs.
Federal Taxes for Texas LLCs
Federal taxes for Texas LLCs depend on the chosen tax classification and structure.
- Single-Member LLCs
- Multi-Member LLCs
- S-Corp Taxation
- C-Corp Taxation
Regardless of your tax classification, all Texas LLCs are responsible for paying state income, sales, unemployment insurance, and payroll taxes.
Other Taxes Including Franchise Tax
Aside from the taxes discussed so far, Texas LLCs may also be considered taxable entities, subject to the Franchise Tax if they exceed a certain revenue threshold.
Additionally, Texas LLCs with employees must pay employer taxes, including federal and state obligations such as Texas unemployment insurance taxes.
Several other taxes may apply to Texas LLCs, depending on the nature of the business and the location in which it operates.
1. Texas State Income Tax
It is important to note that Texas does not have a state income tax. However, Texas taxes, such as other business taxes, may apply depending on the industry and location of your Texas LLC.
2. Texas Sales Tax
Texas LLCs selling products must collect sales tax and obtain a Seller's Permit from the Texas Comptroller of Public Accounts.
To comply with state regulations, they are required to pay sales tax. Texas's state sales and use tax rate is 6.25%, with local taxes bringing the total rate to 8.25%.
3. Payroll Tax
Texas LLCs with employees must handle payroll taxes and filings. This can include federal and state employer taxes, such as state unemployment insurance taxes.
4. Unemployment Insurance Tax
Texas LLCs with employees are required to pay unemployment insurance tax. This tax, imposed on employers, finances unemployment benefits for individuals who have been laid off.
To ensure compliance with unemployment insurance tax requirements and pay self-employment tax, Texas LLCs should know how to file their LLC business taxes and should consult with an experienced tax professional or accountant.
What is Tax-Deductible for an LLC in Texas?
Various expenses, such as business-related expenses, are tax-deductible for an LLC in Texas. Businesses with revenues below a certain threshold may choose to file the EZ computation report, which simplifies the tax process.
Common tax deductions and expenses for Texas LLCs include:
- Business-related expenses, such as office supplies, rent, and advertising costs
- Up to $5,000 for start-up costs
- An additional $5,000 for organizational costs in the first year of business.
Texas LLC owners can lower their tax liability and increase overall profits by understanding and taking advantage of these deductions.
Related Articles:
- Top LLC Formation Services in Texas
- Professional Registered Agent Services in Texas
- Look Up an LLC in Texas
FAQs
Do I Have To Pay An Annual Fee For My LLC In Texas?
No, you do not have to pay an annual fee for my LLC in Texas. However, Texas LLCs must pay an annual franchise tax, and most small businesses are exempt from this fee.
What Is A Franchise Tax In Texas?
A franchise tax in Texas is a privilege tax imposed by the Texas Comptroller of Public Accounts on each taxable entity formed or organized in Texas or doing business in Texas. Unlike many other states, Texas does not impose a personal income tax, which benefits individual owners of LLCs and small businesses by allowing them to retain more of their earnings.
How Do I Choose The Right Tax Classification For My Texas LLC?
To choose the right tax classification for my Texas LLC, you will need to incorporate many factors, including the number of members you have, the type of business you are operating, and your personal tax situation.
Do You Need Help Filing Your Texas LLC Taxes?
If you're seeking assistance with your Texas LLC tax filings, QuickBooks can be a valuable partner. QuickBooks is secure, reliable, and cost-effective as it is a subscription-based service where you only pay for the features you need.
QuickBooks also has automated tasks, integrations, and mobile apps that can save you time and money, streamline your business processes, and allow you to access your data and enter transactions on the go.
If you are considering using QuickBooks, I recommend taking advantage of the free trial to see if it is a good fit for your business.
