Texas offers a unique tax environment for small businesses. With no state personal or corporate income tax, the tax landscape is fundamentally different from most other states. However, Texas businesses still face the franchise tax, property taxes, sales taxes, and federal tax obligations. This guide covers the key tax considerations for Texas small businesses in 2026.
Texas Franchise Tax
The franchise tax (margin tax) applies to most entities doing business in Texas. Key points for 2026:
- Standard rate: 0.75% of taxable margin
- Wholesale/retail rate: 0.375% of taxable margin
- No-tax-due threshold: Businesses below the threshold owe nothing. Check the Comptroller for the current threshold
- EZ computation: Available for businesses below the EZ revenue threshold
- Filing requirement: Most entities must file annually, even if no tax is due
Texas Sales Tax
The state rate is 6.25%, with local additions up to 2% for a maximum combined rate of 8.25%. Businesses must collect and remit sales tax on taxable goods and services. Key exemptions include manufacturing equipment, agricultural supplies, and certain data center equipment.
Texas Property Tax
Property taxes are assessed by local jurisdictions (counties, cities, school districts, special districts). Texas has relatively high property tax rates compared to other states, but offers abatements, the Freeport Exemption, and pollution control exemptions that can significantly reduce liability.
Federal Tax Obligations
Income Tax
Texas businesses pay federal income tax based on their entity type. LLCs and S-Corps pass income through to owners. C-Corps pay the 21% federal corporate rate. Sole proprietors report business income on their personal returns.
Employment Taxes
All Texas employers must pay federal payroll taxes (Social Security, Medicare), federal unemployment tax (FUTA), and Texas state unemployment tax (SUTA). SUTA rates vary based on the employer's experience rating.
Key Tax Credits and Deductions
- WOTC: $1,200-$9,600 per qualifying hire
- R&D tax credit: Credit for qualified research expenses; startup payroll tax offset available
- Section 179: Immediate expensing of qualifying equipment purchases
- Qualified Business Income (QBI) deduction: Up to 20% deduction for pass-through entity owners
- Home office deduction: For qualifying self-employed individuals
Tax Planning Strategies
- Evaluate your franchise tax computation method annually to use the most favorable calculation
- Track equipment purchases for Section 179 and bonus depreciation
- Screen all new hires for WOTC eligibility
- Review inventory for Freeport Exemption eligibility
- Track R&D activities for the federal tax credit
- Consider entity structure optimization with a qualified tax advisor
Find Programs That May Fit Your Business
Tax optimization is one component of financial strategy. Texas businesses may also qualify for grants, workforce training, and incentive programs that provide additional benefits.
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