How to Pay Franchise Tax in Texas
Taxes in Texas can get a little wily. The current franchise tax instruction manual is over 25 pages long, and if you’re not a tax attorney or an accountant, a lot of it looks like gibberish. We’ll be straight with you: learning the ins and outs (and ups and downs) of franchise tax rules will keep you busier than a hound in flea season, so let us lend you hand and get you started.
What is the Texas Franchise Tax?
Unlike most other states, Texas does not require legal business entities to file an annual report. Instead, they require something much more complicated: an information report submitted with their annual tax payment. This report and payment is made to the Texas Comptroller of Public Accounts and is known as the franchise or margin tax. It’s a touchy subject with a checkered past. For more information on how the Texas Franchise Tax came to be, check out our tax history page.
Who is required to pay?
There are very few business entities that are not subject to the Texas Franchise Tax. Even if you think you don’t have to pay taxes, you probably do, and in the off chance you don’t, you will definitely need to submit some sort of paperwork to the state regardless.
The following types of companies are required to file:
- Business trusts
- Joint ventures
- Professional and business associations
- Series LLCs
- Single member LLCs
Here are the few kinds of entities that are not required to file:
- General Partnerships (only if both partners are natural persons, not LLCs)
- Sole proprietorships
- Unincorporated political committees
However, as of January 1, 2016, if the gross receipts of your company were not over $1,130,000 for the year, you are not subject to the tax, but you will have to file the No Tax Due Report.
An Instructional Guide to Texas Franchise Tax
Here is a step-by-step overview of how to deal with the franchise tax in Texas.
- 1. Determine What You Need to File
Figure out exactly what is required for your entity to file (such as an FEIN) before getting started.
- 2. Choose the Best Filing Method
This is where you may need to call in the big guns. Filing methods differ vastly for businesses, and you want to make sure you the one best suited for your company.
- 3. Complete the Required Documents
Fill in all necessary information and double check to make sure you haven’t missed anything.
- 4. Submit the Documents to the Correct Location
Depending on your filing method, and what the state requires, your filing location may vary.
Do I need anything before I can file?
You are required to provide your FEIN (Federal Employer Identification Number) on any of your tax forms related to the Texas Franchise Tax. A FEIN is a unique nine-digit number issued by the IRS for tracking and tax purposes. The IRS issues these number for free and the entire process can be completed online at the IRS website.
If you are planning on filing your documents online, you will need to sign up for a WebFile account and obtain your WebFile number. WebFile is the online tax filing system used by the State of Texas. It is available for use 24 hours a day, seven days a week. Signing up is easy and can be done completely online. Visit the Texas Comptroller’s Website to learn more and get started.
How the franchise tax total is calculated?
There are two forms you can use to find out your tax total: the E-Z Computation of the Long Form. If your total receipts for the year are over the current threshold ($1,130,000) but under $20 million, then you can use the E-Z form.
There are some drawbacks to using the E-Z form though. You will not be able to deduct costs of goods sold, deduct compensation, take any economic development credits, take any temporary credits, or carry over any credits for business loss.
If you cannot (or do not want to) use the E-Z form, the amount that will be taxed is based on the total revenue of the business and calculated in one of the following ways:
- total revenue times 70%
- total revenue minus costs of goods sold
- total revenue minus compensation
- total revenue minus $1 million
The method of figuring out the margin taxable amount that produces the lowest number is the one that will be used. Once you have that amount, you can figure out the estimated amount of franchise tax you will have to pay.
Retail trader and wholesale companies will be taxed at a rate of .375%. All other companies will be taxed at .75%. An easier way to figure out what you will owe is to use the Franchise Tax Calculation tool on the Texas Comptroller’s Website.
What other documents and forms might be required?
Depending on your entity, tax due, and industry, you may need to file additional documents such as:
- Public Information Report
- Affiliate Schedule
- Common Owner Information Report
- Payment Form
When is the franchise tax due?
The franchise tax is due on May 15th following the year of the entity’s formation. For example, if you formed a business on April 8, 2018, your franchise tax is not due until May 15, 2019.
What happens if I file my franchise tax report late?
If you miss the due date to file your franchise tax report, you will be subject to a $50 penalty.
How do I submit my documents and payment?
There are a few different ways to submit your franchise tax documents and payment to the state.
Approved Electronic Submission Software Providers
The Texas Comptroller has approved submission via select third-party software providers. To find out more about what providers are approved, visit the Texas Comptroller’s Website.
Electronic Data Interchange (EDI)
According to the Texas Comptroller website, EDI is used for businesses with a large number of outlets, leases, schedules, or authorities. The EDI software is industry specific and must be approved by the Texas Comptroller. The state provides free EDI software, but you can also purchase software from approved third-party vendors. For more information, visit the “Electronic Data Interchange (EDI)” section of the Texas Comptroller’s website.
Texas permits some taxpayers to report via telephone using TeleFile. TeleFile is available 24 hours a day, 7 days a week.
You can use TeleFile to report if you didn’t have any taxable sales and don’t owe any taxes. You may also use TeleFile if you had taxable sales, but still don’t owe any taxes. If you file via TeleFile, you do not have to submit a paper of PDF form to the state.
If you are eligible to file via TeleFile, you can find more information at the Texas Comptroller’s website, or you can call the TeleFile line at 1-888-4-FILING (1-888-434-5464).
If you are unable to utilize an electronic method to file your franchise tax documents or any necessary reports, you can file via mail by downloading and printing the required paperwork from the Texas Comptroller’s website. Once you have completed the forms, send them to:
Texas Comptroller of Public Accounts
P.O. Box 149328
Austin, TX 78714-9348
Depending on type and amount of tax, some taxpayers may be required to file and pay online. For more information on these rules, visit the “File and Pay” section of the Texas Comptroller’s website.
I’m as confused as a goat on AstroTurf.
Where can I find more information?
Understanding the Texas Franchise Tax is as easy as putting socks on a rooster, so we understand if you have a few more questions. To find out more about the who, what, where, when, and why, here are some places you can get a littler more know-how:
Questionnaires For Franchise Tax Accountability
Texas Comptroller Index to Rules by Subject Matter
Or you can call the Texas Taxpayer Services Line at 1-800-252-1381. This line is specifically dedicated to franchise tax questions and is available for your assistance Monday through Friday, from 8 AM until 5 PM.
What about the No Tax Due Report?
Passive entities in Texas may be required to file a No Tax Due Report in lieu of the franchise tax. All No Tax Due Reports must be filed online. To do so, create a WebFile account and provide the information required. For more information on this report, check out our “How to File a No Tax Due Report in Texas” page.
New Veteran Owned Businesses
According to Texas Administrative Code §3.574, businesses owned b US veterans don’t have to pay the franchise tax for the first five years of operation. To qualify for this exception, veterans must submit a “Letter of Verification of Veteran’s Honorable Discharge” from the Texas Veterans Commission and completed Form 05-904 to the Texas Secretary of State.
Once the business is formed, in order to keep its tax-free status, it must file a No Tax Due report for each tax reporting period. If this report is not filed, the businesses will be subject to a $50 fee.
This specific tax provision expires on January 1, 2020; however, if your business qualifies before this date, it will still be considered exempt to the franchise tax. For more information on how to complete this certification, check out our “How to Complete the Certification of new Veteran-Owned Businesses” page.
Texas Franchise and Foreign Legal Entities
If you are operating a business in Texas that was formed in a different state, you are also required to file a franchise tax report. The reporting window for the document is 1 year and 89 days after the first day the company was officially registered to do business in Texas.