If you’re doing business in Texas, you won’t be asked to pay a traditional corporate income tax. But don’t be too quick to celebrate, because the state of Texas still expects you to contribute to its revenue stream just in a different way. That’s where the Texas Franchise Tax comes in.
This isn’t a tax on your profits. It’s not a sales tax either. It’s what’s called a “privilege tax” in other words, a fee the state charges you simply for the privilege of doing business there. Whether your company is profitable or not, if it’s actively operating or registered in Texas, the Texas Comptroller expects you to file a franchise tax return each year. In some cases, you’ll owe zero. In others, you’ll pay a percentage based on your revenue. But either way, the requirement to file is mandatory for most businesses.
Who Needs to Pay the Texas Franchise Tax?
The short answer is: almost all business entities, except sole proprietorships. The long answer includes corporations, limited liability companies (LLCs), partnerships (limited or general), professional associations, business trusts, S corporations, and even certain non-profits if they engage in unrelated business activities.
If your business is chartered in Texas or doing business in Texas which can mean having employees, owning property, or having sales operations there you’re expected to file.
However, not all businesses end up owing tax. And that’s where the thresholds come in.
The No-Tax-Due Threshold (2024–2025)
For report years 2024 and 2025, the no-tax-due threshold is $2,470,000 in annual total revenue. That means if your business makes less than this amount, you do not owe any franchise tax. You still have to file, but you won’t pay.
This is a big deal for small and medium-sized businesses. The threshold was increased from $1.18 million in recent years, effectively removing many small businesses from having to pay anything.
Still, just because you don’t owe doesn’t mean you get to ignore it. Filing is still required either through a Public Information Report, a No-Tax-Due Report, or a Long Form Franchise Tax Report depending on your situation. Starting in 2024, however, the state eliminated the standalone “No Tax Due” form. Instead, small businesses must file through the Public Information Report or Ownership Information Report depending on their business type.
How the Tax Is Calculated
If your revenue exceeds $2.47 million, now it’s time to pay up. But even then, Texas gives you options on how to calculate your “taxable margin.” Your business can pick from a few different methods, and you’re allowed to choose the one that results in the lowest tax liability. Smart, right?
The taxable margin can be calculated in one of four ways:
- Total revenue minus cost of goods sold (COGS)
- Total revenue minus compensation
- Total revenue times 70%
- Total revenue minus $1 million (only in older methods, mostly phased out)
Once you have your taxable margin, then you apply the appropriate tax rate.
Tax Rates in Texas: 0.75%, 0.375%, and 0.331% (EZ)
There are three tax rates in Texas, and which one applies to you depends on your business type and the method you use.
- Standard Rate – 0.75%:
This applies to most entities. Once you calculate your taxable margin, you multiply it by 0.75% to get your tax owed. - Reduced Rate – 0.375%:
This is for retail and wholesale businesses. These industries typically operate on thin margins, so the state gives them a break. If you qualify as a retailer or wholesaler under the state’s definitions, you’ll pay only 0.375% of your taxable margin. - EZ Computation Rate – 0.331%:
If your business has $20 million or less in total revenue, you can opt for the EZ Computation method, which simplifies your tax reporting. You don’t calculate deductions, you simply take your entire revenue and multiply it by 0.331%. Easy, but it often results in a slightly higher tax compared to the other methods if you have large expenses.
Note: Even if you owe zero tax because you’re under the threshold, your business must still file an annual report.
When and How to File
The Texas Franchise Tax Report is due every year on May 15. If that date falls on a weekend or holiday, the deadline shifts to the next business day. Late filings are subject to penalties and interest, even if you owe nothing.
You file electronically through the Texas Comptroller’s Webfile system and if you’re required to pay, you can also make payment online. Businesses with no tax due can submit reports quickly, while larger entities need to complete a full margin calculation.
Real Example: Let’s Say You Own a Small Marketing Agency
Let’s walk through a sample calculation. Say your agency made $3 million in revenue in 2024, and your cost of goods sold (COGS) was $1.5 million. Your taxable margin would be $1.5 million.
At the standard 0.75% rate, your tax owed would be:
$1,500,000 × 0.0075 = $11,250
But if you used the 70% method:
$3,000,000 × 0.70 = $2,100,000 → $2,100,000 × 0.0075 = $15,750
In this case, you’d go with the COGS deduction because it results in lower tax. You’re allowed to choose the method that minimizes what you owe.
The Bigger Picture: Why This Tax Exists and What It Funds
Texas doesn’t have a personal income tax or a corporate income tax, so the franchise tax plays a crucial role in funding services like education and infrastructure. It generates over $4 billion per year in revenue for the state. That’s why, even though many business owners find it frustrating or confusing, it’s a key part of how Texas balances its budget while remaining a tax-friendly state overall.
Some critics argue that the tax, while seemingly low, has a disproportionate effect on small service-based businesses, especially those that don’t have a lot of deductible expenses. Meanwhile, advocates say it helps make up for the absence of income tax without overly burdening individuals.
Final Thought
So, how much is the franchise tax in Texas? Technically, it’s 0.75% for most, 0.375% for retailers/wholesalers, and 0.331% if you opt for the simplified EZ method and qualify. But in practice, it depends on how much revenue you bring in, how you calculate your margin, what deductions you can claim, and what method you choose.
The good news? If your business is just getting started and your annual revenue is under $2.47 million, you’ll owe zero. Just don’t forget to file anyway, or you might end up with a penalty for a tax you didn’t even owe.
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