Texas LLC and State Income Tax — Why There Is None

Texas is one of nine US states with no personal or corporate income tax. This is not a loophole, a deduction, or a threshold — the Texas Constitution explicitly prohibits the legislature from imposing a personal income tax without voter approval via constitutional amendment. For the full picture, see our Texas LLC tax guide.

What This Means for Your Texas LLC

Single-member LLC: Your LLC's net income passes through to your personal federal return (Schedule C). You owe federal income tax and self-employment tax on that income. But no Texas state return is filed and no state income tax is owed.

Multi-member LLC: The LLC files a federal Form 1065 and issues K-1s. Each member reports their share on their personal federal return. Again, no Texas state filing for income tax — because it does not exist.

S-corp elected LLC: Income passes through on K-1s. Members pay federal income tax on their K-1 income. No Texas state income tax. Self-employment tax savings come from splitting income between salary and distributions.

C-corp elected LLC: The LLC pays 21% federal corporate tax. It does NOT pay Texas corporate income tax because Texas has no corporate income tax either. However, the LLC would still owe Texas franchise tax (margin tax) if revenue exceeds the threshold.

How Texas Makes Up the Revenue

Without an income tax, Texas funds state government primarily through:

• Sales and use tax — 6.25% state rate (generates ~60% of state revenue)
• Texas franchise tax (margin tax) — targets larger businesses with over $2.47M in revenue
• Property taxes — among the highest in the nation (average effective rate ~1.6%)
• Oil and gas severance taxes — significant revenue from Texas energy production
• Motor vehicle sales tax — 6.25% on vehicle purchases

This is why Texas has comparatively high property taxes and sales taxes — they compensate for the lack of income tax.

Implications for LLC Members

Resident members:

• No state tax return required for LLC income
• Significant savings compared to California (13.3%), New York (10.9%), or New Jersey (10.75%)
• Property taxes on business real estate may be higher than other states

Non-resident members:

• If you live in another state with an income tax, you still owe income tax to your home state on your LLC's pass-through income
• Texas will not tax you, but your state of residence will
• No reciprocity agreements needed because Texas has nothing to reciprocate

Moving to Texas:

• If you relocate to Texas from an income tax state, your LLC income immediately becomes free of state income tax (effective on your move date)
• No Texas return to file — your only obligation is the annual Franchise Tax Report/Public Information Report with the Comptroller

Texas vs. Other No-Income-Tax States

Analysis: Texas combines no income tax with no mandatory annual fee (below the franchise tax threshold), making it one of the cheapest states for LLC maintenance. Wyoming is cheaper at $60/year but has a smaller economy and less legal infrastructure.

FAQ

Will Texas ever implement a state income tax?

Under the current the Texas Constitution, implementing a personal income tax requires both a two-thirds vote of the legislature AND approval by Texas voters in a statewide referendum. In 2019, voters approved a constitutional amendment (Proposition 4) that further reinforced this prohibition. Political sentiment strongly opposes any income tax. It is extremely unlikely to change.

Do I still need to file any Texas returns?

Yes — the annual Franchise Tax Report and Public Information Report are due to the Texas Comptroller by May 15 each year. These are not income tax returns, but they are mandatory compliance filings. Most LLCs file "No Tax Due" and owe $0, but you must still file the report.

Does "no state income tax" mean I pay no taxes at all on my LLC income?

No. You still owe federal income tax on your LLC's profits (reported on your personal Form 1040). You also owe self-employment tax (15.3%) on net self-employment income unless you elect S-corp treatment. And if your LLC sells taxable goods/services, you must collect and remit Texas sales tax.

How does this affect my decision of where to form my LLC?

If you operate in Texas (customers, office, employees here), forming in Texas means you benefit from no state income tax plus no requirement to register as a foreign LLC in another state. If you form in another state but operate in Texas, you still benefit from Texas's no income tax — but you pay the formation state's fees plus Texas foreign LLC registration fees.