How Your Corporation Will Be Taxed

In this guide, you'll learn about the main Texas taxes that apply to corporations, including sales, self-employment, corporate and federal taxes.

How your corporation is taxed will depend on whether it's a Texas S Corporation or C Corporation.

Texas Taxes for Corporations

There are two types of TX state tax you must pay to the TX Comptroller: sales and franchise. Depending on how your business is set up, you may also need to pay use tax.

Important: All of these taxes apply whether you have a C Corp or an S Corp.

Texas State Income Tax

Texas is one of nine states that do not have income taxes.

 

Texas Sales and Use Tax

These tax types are similar enough that they're often categorized together. It's still important to understand the differences between them.

Sales Tax

If you sell physical products (such as electronics, books, cars, furniture, appliances, raw materials, etc.) or certain services, you may need to collect TX sales tax at the point of purchase. You'll remit the taxes you collect to the TX Comptroller.

Most states, including Texas, don't levy sales tax on goods considered to be necessities, such as gas, clothing, medication and some grocery items. 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 TX 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.

Use Tax

If you purchase physical products outside the state for use in Texas from a seller who doesn't charge Texas sales tax, you may need to pay use tax. You may also hear this referred to as the Texas sales and use tax.

For example, if you buy furniture for your corporation from a company in a state that either doesn't have a sales tax or has a sales tax that is lower than the TX sales tax, you'll be responsible for paying the use tax.

The current use tax rate is 6.25 percent, and you'll pay it directly to the TX Comptroller.

 

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 corporation.

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 (which increases every two years), 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 corporation losing the right to do business in Texas and possibly having to pay a fine to reinstate it.

Talk to your accountant or tax preparer, or contact the Comptroller to determine whether you're required to pay the franchise tax and to ensure you're paying the correct amount.

You can also use the state's Franchise Tax Calculator to determine how much you might owe, or whether you owe anything.

Public Information Report

When you report your Texas franchise tax status, you must also file a TX Public Information Report. This document collects your corporation's information (business address, officer names and titles, etc.), which the Comptroller forwards to the Secretary of State (SOS). The SOS maintains that information in the state's business records registry. This is the information you access when you perform a Texas corporation search to name your business.

You'll find all the Texas corporation forms you need to file and pay your TX Franchise Tax and file your TX Public Information Report on the Comptroller's website.

Federal Taxes for Corporations

Federal taxes can be complicated, so speak to your accountant or professional tax preparer to ensure that your Texas corporation is paying the correct amount, and that you're paying the correct individual amount.

Federal Self-Employment Tax

Whether and how you pay this tax depends on whether you have a C Corp or an S Corp.

Federal Taxes for C Corps

All shareholders who earn wages or a salary from a C Corporation 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 a salary of $20,000, you would pay $3,060.
  • On a salary of $50,000, you would pay $7,650.
  • On a salary of $90,000, you would pay $13,770.
  • On a salary of $120,000, you would pay $18,360.

Federal Taxes for S Corps

The Internal Revenue Service allows a corporation 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. Incfile can also file the form for you. Use our S Corp Tax Calculator to get an idea of how much money you could save with this election.

Consult with your accountant or tax advisor for more information on reducing your self-employment tax through an S Corporation tax election.

Treating your business as an S Corp can help you save money.

We can file the paperwork with the IRS on your behalf.

Federal Income Tax

You must pay regular federal income tax on any wages or salary your corporation pays you, regardless of its type. The amount of income tax you pay depends on your earnings, current income tax bracket, deductions and filing status.

Speak to your accountant or tax professional for more information.

Taxes Specific to C Corporations

Regardless of the state where your corporation is based, corporate taxes can get pretty complicated. We provide some basic information here, but we strongly encourage you to consult with a tax professional to ensure your corporation pays the right taxes in the right amounts to help you avoid penalties, fines and worst of all, tax audits.

Corporate Tax

Unlike a limited liability company or an S Corporation, a C Corporation is required to file a corporate tax return and pay taxes on any profits.

When those profits are paid to shareholders as dividends, they will also be subject to taxation on the shareholders' personal tax returns.

This is often referred to as “double taxation” and is one reason many business owners prefer to file their taxes as S Corporations.

Note: It is possible for a C Corp to file taxes as an S Corp. Consult with your accountant or professional tax advisor for more information.

Stock Dividends

A C Corporation may pay shareholders dividends as a share of the profits of the company. The value of dividends to which each shareholder is entitled depends on how many shares they own.

Dividends distributed to shareholders are taxed twice — first at the corporate level as profit (on the corporation’s Form 1120, the U.S. Corporation Income Tax Return) and again at the individual level as stock dividends (on the shareholder's Form 1040, the U.S. Individual Income Tax Return).

Taxes Specific to S Corporations

You must pay federal income tax on both your salary and any distributions you take from the business.

Need someone to file your corporate taxes?

Incfile provides a complete Business Tax Filing service.

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.

Employer Payroll Tax Withholding

All employers are required to withhold federal taxes from their employees’ wages. You’ll withhold 7.65 percent of their taxable wages, and your employees will also be responsible for 7.65 percent, adding up to the current federal tax rate of 15.3 percent.

Speak to your accountant for more information.

Employees May Need to File Tax Returns

Regardless of whether you withhold federal and state income tax, your employees may need to file their own tax returns.

Employee Insurance and Other Requirements

You may also need to pay insurance for any employees, such as employee compensation insurance or unemployment tax.

Other Taxes and Duties

Depending on your industry, you may be liable for certain other taxes and duties. For example, if you sell gasoline, you may need to pay a tax on any fuel you sell. Likewise, if you import or export goods, you may need to pay certain duties.

Speak to your accountant about any other taxes or duties you may need to withhold or pay.

 

Estimated Taxes

Most corporations must pay estimated taxes throughout the year—on a quarterly basis—depending on the amount of profit and income you expect to make. Per the IRS:

"Corporations must generally make estimated tax payments if they expect their estimated tax (income tax less credits) to be $500 or more."

The most common types of estimated tax are:

Federal income tax

Federal self-employment tax

C Corporation

If you expect to owe $500 or more in income tax, you must make four quarterly estimated tax payments to the IRS. You'll estimate your total tax on Form 1120-W, then pay 25 percent on each due date.

Important: This applies to you as the owner of the C Corporation, not the business itself. A C Corporation does not pay income tax.

S Corporation

It's a little less straightforward for an S Corp, which will pay estimated taxes by filing an IRS Form 1120-S, which is the income tax return form for S Corps.

Also, as the owner of an S Corp, you'll need to make estimated payments on self-employment tax.

Learn more on the IRS website, and speak to your accountant for more information. Or use Incfile's Business Tax Filing service.

We can help you navigate complex tax situations and avoid costly mistakes with our complete Business Tax Filing service

FAQs on Corporate Texas Taxes

Is There a Texas Sales and Use Tax?

Yes. Texas does have a sales tax, which may vary among cities and counties. Depending on how you run your business, you may also need to pay use tax. You can find more information above.

Is There a Texas State Income Tax?

No. Texas does not have a state income tax.

Is There a TX Franchise Tax?

Yes. Texas does have a franchise tax, which all business entities must pay. You'll find more information above.

Do I Need to Report My Texas Franchise Tax Status Every Year?

Yes. Even if you don't owe any franchise tax, you must still file a report to that effect. Read more above.

Do I Need to Pay Estimated Taxes?

Yes. In most cases, you must pay estimated taxes to the federal government, whether you run a C Corp or an S Corp. You'll find more information above.

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