Texas franchise tax is a state business tax, not a personal income tax

Texas has no personal income tax, but it does tax businesses through the franchise tax. This is a tax on the privilege of doing business in Texas. It applies to corporations, partnerships, limited liability companies (LLCs), and some other business structures — not to individual workers or sole proprietors with no employees.

The tax is calculated one of three ways, depending on your business type and revenue. Most businesses pay based on their revenue, but some pay based on net income or a fixed amount. The rate is low compared to income taxes in other states, but the rules about who owes it and how much are specific and worth understanding if you run a business in Texas.

Key Takeaways

  • Texas franchise tax applies to most business structures except sole proprietors and general partnerships with no employees, and the rate is 0.375% to 0.75% of revenue depending on business type.
  • You owe franchise tax if your business has revenue of at least $1.23 million in a year, though some businesses with lower revenue still have to file.
  • The tax is due to the Texas Comptroller of Public Accounts, and you file using Form 05-102 or through the Comptroller's online system.
  • Failure to file or pay on time results in penalties that start at 5% of the unpaid tax and can reach 25% if the failure is deemed intentional.
  • Some businesses, including nonprofits, certain agricultural operations, and financial institutions, are exempt or taxed under different rules.

Who has to pay Texas franchise tax

Not every business in Texas owes franchise tax. Sole proprietors — people who own a business by themselves with no employees — do not owe it. General partnerships where all partners are active in the business and there are no employees also do not owe it. If you fall into either category, you report business income on your personal tax return instead.

Most other business structures do owe it: corporations (C-corps and S-corps), LLCs, limited partnerships, and professional associations. The threshold is revenue of at least $1.23 million in a calendar year. If your revenue is below that, you generally do not have to file — but there are exceptions. Certain businesses, such as those in specific industries or with particular structures, may owe tax even below the threshold, so checking with a tax professional or the Texas Comptroller's office is wise if you are close to the line.

How the tax is calculated

Texas offers three methods to calculate franchise tax, and your business structure determines which one applies. The most common is the revenue method, which taxes 0.375% of your total revenue. This applies to most businesses, including corporations and LLCs.

The net income method taxes 0.75% of your net income instead of revenue. This is available to certain businesses and can result in a lower tax if your profit margin is much smaller than your revenue. The no-tax-due method is a flat fee of $325 per year for businesses with revenue between $1.23 million and $10 million that have no net income or a loss. Once revenue exceeds $10 million, you must use one of the other two methods.

You choose the method that results in the lowest tax for your business. The Comptroller's office provides worksheets and online tools to help you calculate which method works best for your situation.

Filing and payment important date

Franchise tax returns are due to the Texas Comptroller of Public Accounts on May 15 each year for the prior calendar year. If May 15 falls on a weekend or holiday, the important date moves to the next business day. You file using Form 05-102 (Franchise Tax Public Information Report) or through the Comptroller's online filing system.

Payment is due on the same date as the return. The Comptroller accepts payment by check, electronic funds withdrawal, credit card, or through their online portal. If you cannot file by the important date, you can request an extension, though the extension does not extend the payment important date — taxes owed are still due May 15, and interest accrues on any unpaid balance after that date.

Penalties for late filing or non-payment

Missing the franchise tax important date carries real costs. If you file late but do pay, the penalty is 5% of the unpaid tax for each month or part of a month the return is late, up to a maximum of 25%. If you do not file at all, the penalty is 10% per month or part of a month, also capped at 25%.

Interest also accrues on any unpaid tax at a rate set quarterly by the Comptroller — currently around 8% annually, though this changes. The longer you wait to file and pay, the more interest compounds. If the Comptroller determines that your failure to file was intentional, the penalty can reach 25% when ready rather than accumulating monthly.

Businesses that are exempt or have different rules

Several categories of businesses do not owe franchise tax or owe it under different rules. Nonprofits organized under Section 501(c)(3) of the Internal Revenue Code are exempt. Agricultural operationsFinancial institutions

Insurance companies, utilities, and certain other regulated industries also have their own tax rules. If your business operates in a specialized industry or has a nonprofit structure, check the Texas Comptroller's website or speak with a tax professional to confirm whether standard franchise tax applies to you.

Why Texas uses franchise tax instead of income tax

Texas has no state income tax on individuals or businesses. Instead, the state funds itself through sales tax, property tax, and the franchise tax on businesses. The franchise tax is relatively low — 0.375% of revenue for most businesses — because it is meant to be a tax on the privilege of operating in the state, not a replacement for income tax.

This structure makes Texas attractive to businesses, particularly those with high revenue but lower profit margins. However, it also means that the state relies heavily on sales and property taxes, which can affect the cost of living and doing business in different ways than income tax states.

Frequently Asked Questions

Do I owe franchise tax if I am a sole proprietor?

No. Sole proprietors do not owe franchise tax. You report your business income on your personal tax return instead. Franchise tax applies to corporations, LLCs, partnerships with employees, and similar structures.

What if my business revenue is below $1.23 million?

You generally do not have to file a franchise tax return if your revenue is below the threshold. However, some businesses in specific industries or with particular structures may owe tax even below $1.23 million. If you are unsure, contact the Texas Comptroller's office or a tax professional.

Can I file my franchise tax return online?

Yes. The Texas Comptroller of Public Accounts offers online filing through their website. You can also file by mail using Form 05-102. Online filing is faster and reduces the chance of errors.

What happens if I miss the May 15 important date?

You will owe a penalty of 5% of the unpaid tax for each month or part of a month the return is late, up to 25%. Interest also accrues on any unpaid tax. You can request an extension, but it does not extend the payment important date — taxes are still due May 15.

Is there a difference between franchise tax and income tax?

Yes. Franchise tax is a tax on the privilege of doing business in Texas and is based on revenue or net income. Income tax is a tax on earnings and is paid by individuals. Texas has no state income tax, but it does have franchise tax on businesses.