Business Taxes in Arlington TX
Business owners in the Lone Star state will need to understand Texas business taxes and keep up with their business tax liability to avoid severe consequences. Companies may be subject to penalties and fines if they do not pay their business taxes. Also, company funds may be garnished due to non-payment. What’s more, the business owners themselves can also be prosecuted for tax evasion and other federal tax crimes.
There are numerous types of business taxes Texas companies are subject to. For starters, the tax that companies have to pay on earnings is known as the franchise tax in Texas. In addition to paying franchise tax, Texas business owners may also have to pay sales and use tax depending on the particular product or service they sell.
The Texas franchise tax
The method for calculating a company’s basic franchise tax in Texas is fortunately fairly simple. The tax is calculated at a rate of 1 percent of any taxable margins.
A company’s taxable margins could be found from one of three possible figures. Your small business’s taxable margins could be:
- 70 percent of the company’s revenue
- All of the company’s revenue with the cost of goods sold subtracted out
- All the revenue minus the compensation total for the company
Certain types of business in Texas may not be subject to the franchise tax depending on the exact situation. In certain situations, a sole proprietorship or a partnership may not have to pay the franchise tax.
Franchise taxes for sole proprietorships and partnerships
While the majority of partnerships out there are required to pay the franchise tax, the majority of sole proprietorships do not need to pay this tax. The setup of a partnership helps determine whether or not a partnership is required to pay the franchise tax.
If a partnership is set up like a sole proprietorship and it is owned by individuals who directly receive company income, the partnership is not required to pay a franchise tax. On the other hand, if the partnership is not so simple and involves more complex distribution of company earnings, the franchise tax must be paid.
It’s important to make note of the fact that Texas sole proprietorships and partnerships still need to pay federal business taxes even if they don’t have to pay state business taxes in Texas. Those who can avoid paying the Texas franchise tax just save on the 1 percent state tax. They are still liable to pay federal business taxes at a rate that will depend on a variety of factors including their annual revenue.
Franchise taxes for limited liability companies
A lot of small businesses form limited liability companies (LLCs) due to the legal protections this company setup offers. Limited liability companies must pay the 1 percent franchise tax in Texas. However, it’s worth noting that any income that goes right to the company owners as income is not subject to any state income tax.
Franchise taxes for corporations and S-corporations
When it comes to corporations and S-corporations, business taxes are calculated a little differently across the country depending on which type of corporation the company is. A corporation will be subject to the 1 percent franchise tax. However, in many states an S Corporation will generally not be subject to the franchise tax.
S Corporations are usually taxed according to shareholder equity in the company. This is how federal taxes on S Corporations are calculated. It’s also how state taxes on S Corporations are often calculated.
However, Texas is an exception. Texas subjects S Corporations who earn more than the no-tax-due threshold to the franchise tax and does not subject stockholders in an S Corporation to state income taxes on their earnings. This makes the S Corporation setup beneficial to small businesses in Texas who wish to encourage stockholders to invest in them thanks to the tax savings. The S Corporation setup is also beneficial to Texas S Corporations that earn below the no-tax-due threshold.
Sales and use tax
Business owners engaged in retail sales, lease sales, and rental sales will need to pay a tax of 6.25 percent on all of their sales. Additionally, localities will generally tax companies on sales at some rate that won’t exceed two percent. Companies will need to apply for a sales tax permit to begin collecting and paying sales tax.
Companies handling retail sales in Texas should look at their locality’s sales tax requirements to make sure that they are keeping up with their sales tax liabilities. If you’re wondering how Texas business taxes will affect your small business, it makes sense to consult an accountant who is familiar with Texas tax rates and the tax obligations that exist for various business types under state and federal law.