Understanding LLC Taxes In Texas
Taxes are required to be paid on 3 different levels:
Federal income taxes for an LLC
Federal income taxes get filed with the Internal Revenue Service (IRS).
A majority of Texas LLCs have default tax elections that are IRS tax-reporting entities but not tax-paying entities This means that the LLC does not file a tax return of its own with the IRS. Instead, the losses and profits of the LLC flow-through to the individual owners of the business, and the owners are the ones who are responsible to file the profits or losses on their own income tax returns.
The IRs taxes an LLC, by fault, base on how many Members (owners) the LLC has.
An LLC in Texas with one Member will be taxed by the IRS as a Disregarded Entity.
If the owner of the LLC is a person, the LLC will be taxed by the IRS as a Sole Proprietorship
If another company owns the LLC, then the LLC will be taxed by the IRS like a division/branch of the parent company
With Sole Proprietorship/LLC taxation, the LLC does not file a federal tax return. Instead, the LLC’s owner reports and pay any taxes that are owed on their Form 1040 income tax return. The business’s profit and losses are most likely on Schedule C. It might also be necessary to include other Forms and Schedules, depending on how this income is earned.
An LLC in Texas with 2 Members or more will be taxed like a Partnership.
With Partnership/LLC taxation, the LLC is both a tax-reporting entity and must file Form 1065, which is its federal informational return. Also, each Member must be issued a K-1, which reports the member’s share of profits. The K-1 is attached to the member’s Form 1040 income tax return.
The types of taxation above are called “default” tax elections. Noting needs to be done to receive them. When applying for an EIN for an LLC, you need to disclose how many Members your LLC has to the IRS. That will tell them what kind of tax return they can expect.
Also, since Texas is a community property state, LLCs owned by a husband and wife can also choose to be taxed as a Sole Proprietorship rather than a Partnership.
In addition to default tax elections, it is possible to ask the IRS to instead tax your LLC as a Corporation.
For LLCs, there are two different kinds of corporate taxation:
LLC taxed as an S-Corporation
LLC taxed as a C-Corporation
With C-Corp/LLC taxation, for federal tax purposes, the LLC will be treated as a C-Corporation. However, it is not a really common election, since double taxation is faced by a C-Corp/LLC. Usually, this election will only make sense for big companies that have high healthcare expenses, go public, or trying to raise money.
With S-Corp/LLC taxation, for federal tax purposes, the LLC will be treated as an S-Corporation. This election is popular for saving on self-employment taxes. Usually, this makes sense after the net income of the LLC is about $70,000 per year. Usually, it is not a great idea to choose this option when you are a business that is just beginning and is not yet generating much profit.
No State Income Taxes in Texas
Fortunately, there is no personal state income tax in Texas.
All LLCs in Texas are required to file franchise tax reports each year. These reports must be filed by May 15th. Your initial reports are not due until the following year after your LLC was initially formed.
A majority of small businesses do not pay any taxes but still must file a No Tax Due Report. In addition, the Public Information Report might need to be filed.
Sales and Use Tax
LLCs in Texas are responsible to collect sales taxes if it:
sells taxable services in the state of Texas
leases or sells tangible personal property in the state of Texas
In Texas, the base sales tax is 6.25%. However, a majority of cities charge an extra sale tax in addition to that.
Other State Taxes
The agency that collects taxes and then pays for state public services is the Comptroller of Public Accounts in Taxes. The Comptroller collects about 60 different taxes for over 1,400 local governments, cities, and counties.
In addition to sales taxes and franchise taxes, there are some other taxes that certain small business owners might be responsible to pay. Some examples include:
natural gas tax
mixed beverages tax
crude oil tax
coin-operated machines tax
battery sales tax
We recommend that you work with an accountant to further examine your business’s details.
In addition to paying taxes at the state level, your LLC in Texas might have local municipality tax filings as well. It will depend on where your LLC is located and how it makes money.
Do You Have Questions? Contact Information for the Texas Comptroller
If you have questions, the customer service line for the Texas Comptroller can be reached at 888-334-4112. The depart phone numbers can also be found on the Contact Us Texas Comptroller page.
Their office hours are 8 am to 5 pm Central Time, Monday through Friday.