What Taxes Do Small Businesses Pay? A Texas Owner's Overview

A Houston restaurant owner sat down with us last spring. She’d been in business three years. She knew about income tax. She was making her quarterly estimated payments on time.

Then we asked about her sales tax remittance. Her franchise tax report. Her federal unemployment filings.

Blank stare.

She wasn’t negligent. She simply didn’t know these obligations existed. Nobody had ever walked her through the full picture. And she’s far from alone. Many small business owners focus on income tax and miss everything else.

Here’s the reality: “taxes” isn’t one thing. It’s a collection of federal, state, and local obligations, each with its own rules, rates, and deadlines. Understanding what you owe, and to whom, is the foundation of sound tax planning.

Federal Income Tax

This is the one everyone knows about. Your business earns profit, and the federal government wants its share.

How you pay depends on your business structure:

Pass-through entities (sole proprietorships, partnerships, S-Corps, most LLCs) don’t pay income tax at the business level. Instead, profits flow through to the owners’ personal returns. You report business income on your Form 1040, and it’s taxed at your individual rate, currently ranging from 10% to 37%.

C-Corporations pay income tax at the entity level. The current flat federal corporate rate is 21%, established by the Tax Cuts and Jobs Act of 2017. When profits are distributed as dividends, shareholders pay tax again on that income, the so-called “double taxation” that makes C-Corp status less attractive for most small businesses.

For the vast majority of Houston small businesses (the landscaper operating as an LLC, the consultant running an S-Corp, the husband-and-wife partnership) federal income tax flows through to personal returns.

What this means practically: If your LLC earns $100,000 in net profit, that $100,000 shows up on your personal return and is taxed alongside any other income you have.

Self-Employment Tax

This one catches first-time business owners off guard.

When you work for an employer, you each pay half of Social Security and Medicare taxes: 7.65% from you, 7.65% from your employer, for a total of 15.3%.

When you’re self-employed, you’re both the employer and the employee. You pay both halves.

2025-2026 rates:

• Social Security: 12.4% on net earnings up to $176,100 (2025)
• Medicare: 2.9% on all net earnings
• Additional Medicare: 0.9% on earnings above $200,000 (single) or $250,000 (married filing jointly)

A Houston freelance graphic designer earning $80,000 in net self-employment income owes approximately $11,300 in self-employment tax before a single dollar of income tax.

Self-employment tax applies to sole proprietors, single-member LLC owners, and general partners. S-Corp owners pay payroll taxes only on their salary, not on distributions, which is one of the primary reasons business owners consider the S-Corp election.

Payroll Taxes (If You Have Employees)

Once you hire employees, a new set of obligations kicks in.

Employer’s Share of FICA

You pay 7.65% of each employee’s wages:

• 6.2% for Social Security (up to the wage base limit)
• 1.45% for Medicare (no cap)

For an employee earning $50,000, that’s $3,825 annually from your pocket, on top of their salary.

Federal Unemployment Tax (FUTA)

The FUTA rate is 6.0% on the first $7,000 of each employee’s wages. However, employers who pay state unemployment taxes on time receive a credit of up to 5.4%, reducing the effective rate to 0.6%.

For most Texas employers, that works out to $42 per employee per year.

Withholding Responsibilities

You’re also responsible for withholding and remitting your employees’ share of taxes:

• Federal income tax (based on W-4 elections)
• Employee’s share of Social Security and Medicare

The amounts aren’t your money. They belong to the employee and the government. But the responsibility to withhold, report, and remit falls entirely on you. Missing payroll tax deposits is one of the fastest ways to get on the IRS’s bad side. The penalties are steep and the IRS rarely negotiates on them.

Texas Franchise Tax

Texas has no state income tax. Business owners hear that and assume they owe nothing to the state.

Not quite.

Texas imposes a franchise tax (sometimes called the “margin tax”) on businesses operating in the state. It’s essentially Texas’s version of a business income tax, just structured differently.

Who Owes It

Most legal entities (LLCs, corporations, partnerships, professional associations) are subject to the franchise tax. Sole proprietorships and general partnerships owned entirely by natural persons are generally exempt.

The Revenue Threshold

For the 2025 report year, businesses with total revenue at or below $2.47 million owe no franchise tax. They still must file a report (the “No Tax Due” report), but they pay nothing.

This exemption covers the majority of Houston small businesses. But the filing requirement catches people off guard — the business owes nothing, yet the Texas Comptroller still requires a filing by May 15 each year. Missing the filing can result in penalties and jeopardize an entity’s good standing.

Rates for Larger Businesses

For businesses above the threshold:

• Retail and wholesale: 0.375% of taxable margin
• All other businesses: 0.75% of taxable margin

Taxable margin is calculated using the most favorable of several methods, including total revenue minus cost of goods sold, total revenue minus compensation, 70% of total revenue, or total revenue minus $1 million.

Texas Sales Tax

If your business sells taxable goods or certain services, you collect and remit sales tax.

Rates

• State rate: 6.25%
• Local additions: Up to 2% (city, county, transit, special purpose districts)
• Houston combined rate: 8.25% in most areas

What’s Taxable

Texas sales tax applies to tangible personal property (goods) and certain services, including:

• Retail merchandise
• Prepared food
• Amusement services
• Cable TV and telecommunications
• Data processing services
• Debt collection
• Insurance services
• Real property repair and remodeling

Many professional services (accounting, legal, consulting, medical) are exempt from Texas sales tax.

Filing Frequency

The Texas Comptroller assigns your filing frequency based on how much tax you collect:

• Less than $1,500/year: Annual filing
• $1,500 to $14,999/year: Quarterly filing
• $15,000 or more/year: Monthly filing

A Houston retail shop collecting $2,000 per month in sales tax would file monthly. A service business collecting $500 per quarter would file quarterly.

The tax isn’t your money. You collect it from customers and pass it to the state. But if you fail to collect it, or collect it and don’t remit it, the liability is yours.

Texas State Unemployment Insurance (SUI)

If you have employees, Texas requires unemployment insurance contributions.

• Who pays: Employers only (Texas does not withhold SUI from employee wages)
• Wage base: First $9,000 of each employee’s annual wages
• Rate: Varies by employer. New employers typically receive a rate of 2.7%. Established employers’ rates are adjusted based on their claims history, ranging from 0.31% to 6.31%.

The Texas Workforce Commission manages these contributions. Reports and payments are due quarterly.

Local Taxes and Fees

Beyond state obligations, Houston-area businesses may encounter additional local requirements:

City of Houston Taxes and Permits

• Business permits: Required for certain business types. Fees vary by industry.
• Hotel occupancy tax: 7% city tax on short-term lodging (in addition to state and county taxes)
• Mixed beverage tax: For businesses serving alcohol

Harris County

• Property tax: If your business owns real property or has significant tangible business personal property (equipment, inventory, fixtures), you owe property tax to the county, school district, and applicable special districts. Harris County property tax rates are among the higher rates in Texas.

Business Personal Property Tax

This one surprises many business owners. In Texas, tangible business personal property (equipment, furniture, computers, inventory) is subject to local property tax. The county appraisal district sends you a rendition form each year requesting a list and valuation of your business assets.

A Houston contractor with $50,000 in equipment and a $30,000 vehicle used for business could owe several hundred to over a thousand dollars annually in business personal property tax, depending on the applicable tax rates.

Estimated Tax Payments: Tying It All Together

Most of these taxes don’t wait until year-end.

• Federal estimated taxes: Due quarterly (April 15, June 15, September 15, January 15)
• Payroll taxes: Due semi-weekly or monthly, depending on deposit schedule
• Texas sales tax: Monthly, quarterly, or annually
• Texas franchise tax: Annually, due May 15
• Texas SUI: Quarterly

Missing deadlines triggers penalties across the board. The IRS charges roughly 8% on underpaid estimated taxes. Texas adds penalties and interest for late franchise tax and sales tax filings. Payroll tax penalties escalate rapidly, from 2% at 1-5 days late to 15% after 10 days past a final IRS notice.

A calendar and a system aren’t luxuries. They’re necessities.

What a Typical Houston Small Business Actually Owes

Consider a Houston-based LLC (S-Corp election) with one owner-operator, two employees, and $250,000 in annual revenue:

Tax	Approximate Annual Amount
Federal income tax (owner)	Varies by total income
Payroll tax, employer FICA	~$9,200 (on owner salary + employee wages)
FUTA	~$126 (3 covered individuals)
Texas franchise tax	$0 (below $2.47M threshold)
Texas SUI	~$730 (at 2.7% new employer rate)
Texas sales tax	Depends on taxable sales
Business personal property tax	Depends on asset value

None of these amounts alone is staggering. But combined, they represent a significant portion of a small business’s cash flow. And every one of them has its own filing deadline, its own form, and its own penalty for getting it wrong.

The Texas Advantage and Its Limits

Texas’s lack of a state income tax is a genuine advantage. A business owner in California or New York might pay 10-13% in state income tax on top of federal obligations. In Texas, that line item is zero.

But “no state income tax” doesn’t mean “no state taxes.” The franchise tax, sales tax, property tax, and unemployment insurance all still apply. Business owners who relocate to Texas expecting zero state tax obligations find out quickly that the state collects revenue through other channels.

The advantage is real. It’s just not as simple as some people believe.

Keeping Track Without Losing Your Mind

The businesses that handle this well share a few traits:

They keep clean books. Accurate bookkeeping makes tax calculations reliable rather than guesswork. When your records are current, every filing becomes a data exercise instead of a scramble.

They know their deadlines. Every tax has a calendar. The businesses that avoid penalties are the ones with systems, whether that’s a shared calendar, a CPA’s reminders, or automated payroll software.

They plan ahead. Year-round tax planning means no surprises in April, no missed quarterly payments, and no frantic calls to accountants in January.

They track deductions as they occur. Every legitimate deduction reduces what you owe. But deductions only work if they’re documented.

Getting Professional Help

The list above isn’t meant to overwhelm. It’s meant to inform. Every business’s tax picture is different. A solo consultant with no employees and no taxable sales has a much simpler profile than a restaurant with a 15-person staff, alcohol service, and significant equipment.

At EZQ Group, we help Houston business owners understand their full tax picture, meet every deadline, and structure their businesses to keep more of what they earn. From bookkeeping that keeps your records audit-ready to tax planning that minimizes what you owe, we handle the complexity so you can focus on running your business.

Want clarity on what your business actually owes? Contact us to review your tax obligations.

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This article provides general information and is not tax advice. Tax laws change, and every business situation is different. Consult with a qualified tax professional for advice specific to your circumstances.