Texas Small Business Taxes
As a small business owner, it is easy to become mired with the unrelenting burden of acquiring clients and generating revenue. As a result, it is easy to overlook many of the organizational necessities of running a business. One in particular that cannot be avoided is the responsibility of the business owner to pay-to-play. At both the state and the federal level, numerous taxes must be paid on a monthly, quarterly, or annual basis and failure to do so can have disastrous consequences. Below is a basic primer on the state and federal taxes most Texas-based business face.
What is Texas Franchise Tax?
As a general matter, there is a franchise tax “imposed on each taxable entity that does business in this state or that is chartered or organized in this state.”TX. Tax Code §171.001(a) The rate of taxation for the Texas franchise tax is .75% of a company’s “taxable margin” or .375% of taxable margin where the company is engaged primarily in retail or wholesale trade.TX. Tax Code §171.002(a) & (b) For 2021, taxable margin is considered to be the lesser of (i) 70% of a company’s total revenue from its entire business; (ii) a company’s total revenue minus $1,180,000; or (iii) a company’s total revenue minus either COGS or compensation. There is an additional calculation available for companies employing active-duty members of the armed forces.TX. Tax Code §171.101
Because of the simplicity of the calculation of the tax, it is relatively easy to both calculate and abide by on an annual basis. Annual franchise tax reports and the corresponding payment are due on May 15 of every year (due to the winter storms the 2021 deadline has been extended to June 15 and beyond, as needed and by request to the Texas Comptroller). In the majority of cases, both the report and payment can be submitted online through the Texas Comptroller’s website. Failure to make a payment or failure to file a franchise tax report, whether you owe franchise taxes or not, could result in the forfeiture of a company’s right to transact business in the State of Texas. Liabilities incurred while a company has forfeited its right to transact business could potentially be assessed against the business owner individually so it is imperative that business owners are diligent in their reporting and filing.
Sales & Use Tax
Texas imposes a 6.25% 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. Accordingly, all companies providing retail sales, leases, rentals, and taxable services must apply for and maintain a sales tax permit, collect sales taxes from their customers at the point of sale, and remit the sales tax to the state. It is fairly simple to determine that a retail sale is taxable but there is some interpretation required if a company provides a service and a business owner would be wise to seek counsel for such a determination. Taxable services include, but are not limited to:
- Hosting sporting events, antiques shows, concerts, or movies;
- The distribution of broadcast satellite service, subscription television service, or antenna television service to subscribing or paying customers;
- Creating or delivering credit reports;
- Using a computer for word processing, data entry, production, compilation, storage or manipulation;
- Debt collection;
- Gathering or furnishing specialized news or other current information to others;
- Damage and loss appraisal, inspection, investigation, claims adjustment or processing, actuarial analysis or research, and insurance loss prevention;
- Providing access to the internet (subject to a $25/mo exemption);
- Laundry, cleaning, and garment services;
- Motor vehicle parking and storages services;
- Labor and materials to rebuild, replace, alter, modify or upgrade existing nonresidential realty;
- Shoe shining or repair, appliance repair, furniture refurbishing or upholstering, jewelry repair or cleaning and dog grooming;
- Personal services provided by a massage parlor unless the massage services are performed by a licensed physical or massage therapist;
- Pest control and extermination, garbage and other waste collection or removal, janitorial and custodial services (including parking lot sweeping or cleaning), landscaping and lawn maintenance (including tree surgery and plant leasing) and surveying are taxable real property services;
- Any service for which a license is required by the Private Security Bureau of the Texas Department of Public Safety under sections 1702.101 or 1702.102 such as locksmiths, private investigation, armored car services, armed courier services, unclaimed property services, and others;
- Electronic or electrical transmission, conveyance, routing or reception of sounds, signals, data or information using wires, cable, radio waves, microwaves, satellites, fiber optics or any other method now in existence or that may be devised;
- Receiving and relaying or telephone messages by a human operator;
- Services provided by a transmission and distribution utility;
- Selling, processing, or remodeling tangible personal property including, but not limited to, manufacturing, assembling, fabricating or processing products, even when the customer provides the raw materials, tools, or equipment.
As the burden to collect and remit sales tax falls on the retailer or seller who sells the tangible property or provides the taxable services to the end user, a reseller, whose sole purpose of purchasing, leasing, or renting a taxable item is to transfer it as an integral part of a taxable service, may be exempt from the payment of sales tax so long as, upon purchase of the taxable items, they provide the seller with a resale certificate.
Failure to properly file a sales tax report, the comptroller may send an estimated billing amount which they will deem as valid for purposes of collecting taxes unless you contest it. Failure to pay the estimated amount may result in collections actions or tax liens being assessed against the company or the business owner.
Employment & Unemployment Tax
Employing a staff comes with additional expenses over-and-above the agreed upon wage negotiated with each individual staff member. Both the State of Texas and the federal government impose taxes on the employer for wages paid to employees. Additionally, the federal government maintains a withholding requirement whereby the employer must withhold certain income taxes from the employee and remit them to the department of treasury.
At the state level, employers are responsible for contributing to an unemployment insurance pool sponsored by the state. The amount of each employer’s contributions varies but will land at an effective rate of between .31% and 6.31%. Employers are responsible for registering for an account with the Texas Workforce Commission and filing reports as required to identify employees and the amount of wages they are paid in a given year.
Federal employment taxes are much more involved as they include federal unemployment taxes, social security and medicare taxes, and withholding for income taxes.
For starters, all employers must withhold federal income taxes from each employee paycheck to be remitted to the federal government. The amount withheld will vary depending on the information provided by each employee on their W-4 but in the vast majority of cases, there will be some amount of money withheld and remitted.
Additionally, employers are required to withhold the employee portion of social security and medicare taxes then remit the withheld funds as well as the employer’s portion of those taxes to the federal government. Ultimately, for up to the first $142,800 of wages paid, the employee will contribute 6.2% percent of their income to social security tax and the employer will match that contribution. There is an additional 1.45% tax paid by both the employee and employer for medicare but there is no limit on the income for this tax. Additionally, for individuals earning over $200,000 in a year (or couples earning more than $250,000 in a year) there is an additional .9% due for medicare.
Finally, employers are responsible for contribution to FUTA (Federal Unemployment Tax Act). An employer is responsible for contributing 6% of the first $7,000 paid to any employee in a given year.
Reporting and remitting at the state and federal level are paramount. Specifically, the IRS considered funds withheld by an employer to be held in trust for their benefit and will seek collection from individual owners and operators of the company where a company fails to make payments of payroll taxes. Payment due dates will vary depending on each individual taxpayers’ situation but all taxpayers will have to file forms 940, 941, 943, 944, or 945 depending on their specific circumstance as well as make deposits either monthly or semi-monthly. It is imperative that business owner’s either stay on top of their payroll taxes or work with a third-party provider to ensure timely filing of all reports and timely payment of all payroll taxes.
What is the Texas Income Tax?
Income tax rates are determined based on a number of factors beginning with the type of structure under which a company operates. For purposes of this analysis, we review the mainstays of corporate structure in Texas: Corporations, S-Corporations, Limited Liability Companies, Partnerships, and Sole Proprietorships.
Corporations (and Limited Liability Companies taxed as Corporations) are subject to what is commonly known as “double taxation” meaning they are taxed at both the corporation level and the shareholder level. As a result of the 2017 Tax Cuts and Jobs Act, corporations in the United States are taxed at a rate of 21% of their annual income. Double taxation takes place where at the shareholder level, the shareholders are again taxed on any dividends paid out from the corporation.
S-Corporations, Limited Liability Companies taxed as Partnerships, and Partnerships are considered pass-through entities which are not taxed at the company level but rather, income, losses, deductions, and credits flow through to the shareholder/member/partner to be reported on their personal tax returns. This pass-through taxation feature allows business owners to avoid double taxation on corporate income.
The type of tax return filed depends on the type of entity you have established. Corporations file an 1120, S-Corporations file an 1120S, Partnerships file a 1065, and Limited Liability Companies, who must elect to be taxed as a partnership or a corporation at the federal level, file the return commensurate with their election.
Being a business owner can be liberating as it affords an individual a chance to make their own schedule, work on their terms, and be responsible for their own destiny. It is imperative, however, that business owners stay cognizant of the varying governmental bodies to whom they owe taxes. Failure to comply with reporting and payment of taxes will cause a business owner to have to “pay the piper” and the results are not always pretty.