Depending on the type of business, there are a variety of taxes a business in Texas to be aware of with the most common being sales, franchise and self-employment.
Texas Sales & Use Tax
Generally speaking, physical products sold at retail are taxable within Texas. So, if you sell a pair of shoes from your store, you would charge the customer sales tax (which varies depending on where your store is located.
Services in Texas are generally not taxable. Some businesses have a blend of both – say an auto repair shop where a vehicle with a broken alternator has the labor of replacing the part (which isn’t taxed) but the retail cost of the alternator is taxed.
Find more information about what is taxable and to register for the Sales & Use Tax.
Sales & Use Tax Rates
Texas imposes a 6.25 percent state sales and use tax on all retail sales, leases and rentals of most goods, as well as taxable services. Local taxing jurisdictions (cities, counties, special purpose districts and transit authorities) can also impose up to 2 percent sales and use tax for a maximum combined rate of 8.25 percent.
To find the sales tax rate for a particular location, use the Texas Comptroller’s Sales Tax Rate Locator.
Texas Franchise Tax
The Texas franchise tax is a privilege tax imposed on each taxable entity formed or organized in Texas or doing business in Texas.
Entities Subject to Franchise Tax
Each taxable entity formed in Texas or doing business in Texas must file and pay franchise tax. These entities include:
- limited liability companies (LLCs), including series LLCs;
- S corporations;
- partnerships (general, limited and limited liability);
Entities Not Subject to Franchise Tax
The following entities do not file or pay franchise tax:
- sole proprietorships (except for single member LLCs);
- general partnerships when direct ownership is composed entirely of natural persons (except for limited liability partnerships);
- certain unincorporated passive entities;
More information about the franchise tax and rates is available from the Texas Comptroller’s office.
Texas Self-Employment TaxesSelf-employed business owners (sole proprietors, partnerships or LLC's that elect to be taxed as a sole proprietorship or partnership) are required to pay income taxes, Social Security, and Medicare based on the profits generated by the business. Profits are determined before you draw compensation from the business (i.e. your draw or wages are not considered an expense of the business.) Once your liability for federal income tax and self-employment FICA exceeds $500, you will need to deposit the tax payments to the IRS (whether this happens in any one quarter or combination of quarters.)
More information and filing information is at the IRS website.
AccountingAccounting is an essential, but often underestimated part of starting a business. Keeping complete, accurate records is important to the financial health of a business regardless of whether it’s a one-person operation or multinational corporation.
Having a clear picture of sales trends and the business’s financial position gives the business owner data for making decisions about financing, expansion, or other strategic steps.
The decision to handle accounting on your own versus hiring a bookkeeper or accountant is an important one that should be considered carefully. There will certainly be differences in cost and expertise but you should also consider how much additional time you will spend doing your accounting that could be better invested in growing your business.
While a bookkeeper may not be in the budget or even needed in the early stages, there are a number of ways to keep track of your businesses finances.
BasicAccountingHelp.com has a free spreadsheets and educational resources.