Introduction: The Reality of LLC Taxes
Quick question, did you form your LLC because you wanted protection and simplicity, then discovered there is nothing simple about taxes? You are not alone. The good news: once you understand how a Texas LLC is taxed, the annual to-do list gets very manageable. You do not need to become a tax pro. You just need the right checklist and a few steady habits.
Why This Matters for Texas Owners Right Now
Texas is a great place to run a business, with no personal state income tax, strong regional economies, and room to grow. That said, LLCs still face federal taxes, Texas franchise tax, and, for many, sales and use tax. Banks and landlords want clean financial statements. The IRS uses more digital matching, which means sloppy books trigger letters. If you keep your filings current and your accounting records clean, you will stay in good standing with the state and sleep better when April shows up.
Answer in Plain English
An LLC is a legal wrapper under state law. The IRS taxes the income based on your LLC’s federal tax classification. Single member LLCs are usually taxed as sole proprietorships by default. Multi member LLCs are taxed as partnerships by default. You can also elect S corporation status if that fits your situation. No matter how the federal tax is handled, your Texas LLC may have state level filings, especially franchise tax, and you must keep basic compliance items up to date: public records, registered agent, and any sales tax permits if you sell taxable goods or services. The shape is simple. Choose your federal tax path, meet your Texas obligations, keep clean books, and pay your estimated taxes on time.
Federal Tax: Choose Your Lane
Single member LLC: Default taxation as a sole proprietorship. File Schedule C with your individual Form 1040. Pay federal income tax and self employment tax on net profit. Make quarterly estimated tax payments if you expect to owe at least a threshold amount.
Multi member LLC: Default taxation as a partnership. File Form 1065, an informational return. Issue K‑1s to members. Members report pass through income on their personal returns and pay tax personally. The LLC itself does not pay federal income tax.
LLC electing S corporation status: File Form 2553 to elect, then file Form 1120‑S each year. Owners who work in the business take reasonable W‑2 wages, with payroll withholding, and any remaining profit passes through on K‑1s. This can reduce self employment tax in the right circumstances but adds payroll and compliance. Timing of the election and wage level both matter.
No matter the lane, keep clean accounting records, a separate business bank account, and a habit of setting aside taxes as you earn.
Texas Franchise Tax: What to Expect
Texas does not have a personal income tax but does have a franchise tax on many entities, including LLCs. If your total revenue is under the no tax due threshold and you meet the conditions for the year, file a no tax due report along with any required public information report. If you are over the threshold, compute margin using one of the allowed methods, then apply the appropriate tax rate based on your business type. Even when you owe nothing, you may still have to file. Missing it triggers penalties that are easy to avoid with a simple reminder.
Sales and Use Tax: Do You Need to Collect
If you sell taxable goods or services in Texas, you must collect sales tax at the correct combined rate and remit it to the Comptroller. Cities and special districts add their pieces to the state rate, so your point of sale needs to be configured correctly. If you sell online to Texas customers, the same rules apply. If you buy taxable items for use in your business and the seller did not charge Texas sales tax, you may owe use tax. Map sales tax to a separate liability account, reconcile it monthly, and file on time. Sales tax is not your income. Treat it like a trust account to avoid painful surprises.
Payroll: If You Have Employees or Run an S Corporation
If your LLC has employees, or if you elected S corporation status and pay yourself wages, payroll becomes a compliance engine. Register for state unemployment, set up payroll withholding, fund payroll taxes every pay period, and file quarterly and annual payroll returns. Keep payroll reports with your monthly close package. Document reasonable compensation, run payroll on a regular cadence, and keep board or member notes that support your approach. Payroll done right removes risk. Payroll guessed at creates months of cleanup.
Banking and Bookkeeping: Core Habits to Stay Compliant
Separate accounts: Open a business checking account and a business credit card. Run all business activity through them. Pay yourself through owner’s draws or payroll.
Weekly reconciliation: Categorize transactions and reconcile bank and card accounts every week. Attach receipts inside your bookkeeping software.
Monthly close: Aim to close by the tenth business day. Produce a simple pack including profit and loss, balance sheet, AR and AP aging, and a 13-week cash view.
Document sales tax and franchise tax: Keep copies of all filings and payments. Reconcile the sales tax liability each month. Put franchise tax on your annual checklist with a due date reminder.
Quarterly Payments and Cash Planning
LLCs taxed as sole proprietorships or partnerships do not have withholding, so you will likely make quarterly federal estimated tax payments. Mark the four dates: April, June, September, and January. If income is steady, use the safe harbor, paying 100 percent of last year’s total tax, or 110 percent if income was high. If income is seasonal, consider the annualized method so payments track reality. Set up a separate tax savings account and sweep a percentage of profit into it each time client money lands.
Compliance Calendar: A Simple Texas List
- Monthly or quarterly: Sales and use tax filings
- Quarterly: Federal estimated tax payments for owners and payroll returns
- Annually: Texas franchise tax and public information report, federal returns depending on classification, W‑2s, 1099s, and any business personal property renditions
- Ongoing: Maintain registered agent, keep company agreement handy, and update ownership records when members change
When an S Corporation Election Makes Sense
It adds payroll, deadlines, and a separate corporate return. It tends to make sense when the business is generating consistent profit beyond what you would reasonably pay yourself in wages. If profit is uneven or low, the added complexity might not be worth it yet. Run a scenario with a CPA before electing. Timing matters.
Common Mistakes to Avoid
- Commingling funds: Personal charges in business accounts, or business expenses on personal cards
- Ignoring sales tax: Failing to register, collect, or remit
- Skipping franchise tax filings: Even a no tax due year usually requires a filing
- Waiting until March to do the books: Cleanup costs more than maintenance
- DIY payroll in an S corporation without a process: Reasonable wages and timely deposits matter
Texas Flavored Examples
Single member LLC handyman in San Antonio: Sets aside 30 percent of profit monthly for federal estimates, collects sales tax, files quarterly and annually, reconciles weekly.
Two member LLC marketing agency in Austin: Partnership, files Form 1065, issues K‑1s, partners make quarterly estimates, considers S corporation election for payroll.
Multi location retail LLC in Dallas Fort Worth: Registers for sales tax for each location, configures POS correctly, files monthly, pays franchise tax, maintains clean monthly closes.
When to Ask for Help
You do not need a full-time hire to stay compliant. A monthly or quarterly bookkeeper can keep reconciliations and reports tight. A CPA can handle franchise tax, sales tax oversight, and federal returns, and run quarterly check-ins. For S corporation elections, a short planning session can save money and headaches.
A Calm Way to Finish
Texas LLC tax compliance is not complicated when you keep the lanes clear. Pick your federal tax classification and learn its rules. File franchise tax and sales tax on time, keep your books clean, and set aside tax money as you earn. With a few steady habits, compliance becomes background noise, freeing you to focus on customers, your team, and business growth.
