If you sell physical products (such as electronics, books, cars, furniture, appliances, raw materials, etc.) or certain services, you may need to collect Texas sales tax at the point of purchase. You'll remit the taxes you collect to the Texas Comptroller.
In Texas, some items such as medication and some grocery items are exempt from sales tax. The state's Administrative Code, Title 34, Part 1, Chapter 3, Subchapter O, contains an extensive list of TX sales tax rules and exemptions applicable to numerous organizations, services and products.
The Texas sales tax rate is 6.25 percent statewide. Local taxing jurisdictions, such as cities and counties, may also impose sales tax at a rate of up to 2 percent for a total maximum combined rate of 8.25 percent.
Use our sales tax calculator to get an idea of what you'll need to pay, but always check with your accountant and the TX Comptroller to find out whether your business is required to collect sales tax and ensure you remain in compliance.
Texas Use Tax
If you purchase physical products outside the state for use in Texas, you may need to pay use tax. For example, if you buy furniture for your TX LLC from a company in a state that either doesn't have a sales tax or has a sales tax that is lower than the Texas sales tax, you'll be responsible for paying the use tax. The current Texas use tax rate is 6.25 percent, and you'll pay it directly to the Texas Comptroller.
Texas Franchise Tax
Some states — including Texas — levy a tax on certain businesses for the right to exist as a legal entity and do business in the state. This is usually called a franchise tax, transaction tax or privilege tax. Despite its name, this is not a tax on franchises. It is an essential part of filing taxes for your LLC.
The Texas franchise tax rate depends on the amount of revenue your business generates and a few other factors. In fact, if your revenue is below a certain threshold, you won't owe any franchise tax at all. However, you must still file an annual franchise tax report stating there is no tax due. Failure to do so can result in your LLC losing the right to do business in Texas and possibly having to pay a fine to reinstate it.
Texas Public Information Report
When you file your franchise tax report, you must also file a Texas Public Information Report. This document collects your LLC's information (business address, member names and titles, etc.), which the Comptroller forwards to the Secretary of State. The SOS maintains that information in the state's business records registry. This is the information you access when you perform a Texas business entity search to name your business.
Federal Taxes for LLCs
As the owner of an LLC, you must pay self-employment tax and federal income tax, both of which are levied as “pass-through taxation“.
Federal Self-Employment Tax
All members or managers who take profits out of the LLC must pay self-employment tax. This tax is administered by the Federal Insurance Contributions Act (FICA) and covers Social Security, Medicare and other benefits. The current self-employment tax rate is 15.3 percent. You’ll be able to deduct some of your business expenses from your income when calculating how much self-employment tax you owe.
Here are some examples of how much self-employment tax you may need to pay, depending on your earnings:
On profits of $20,000, you would pay self-employment tax of $3,060.
On profits of $50,000, you would pay self-employment tax of $7,650.
On profits of $90,000, you would pay self-employment tax of $13,770.
On profits of $120,000, you would pay self-employment tax of $18,360.
Pay Less Self-Employment Tax by Treating Your LLC As an S Corporation
The Internal Revenue Service allows an LLC to be treated as an S Corporation for tax purposes, provided your business meets certain requirements. This can help you reduce the amount of self-employment tax you pay by allowing you to declare some of your income as salary and other income as distributions or withdrawals.
You do this by filing Form 2553, also known as an S Corp Election form, with the IRS.
Federal Income Tax
You must also pay regular federal income tax on any earnings you take out of your LLC. The amount of income tax you pay depends on your earnings, current income tax bracket, deductions and filing status.
You only pay federal income tax on profits you take out of the business, less certain deductions and allowances. This includes your tax-free amount, plus business expenses and other deductions for areas such as healthcare and some retirement plans.
Employee and Employer Taxes
If you pay employees, there are some slightly different tax implications. Speak to your accountant to get clear guidance for your unique situation.