Texas one of the Lowest Per Capita Tax States

Texas is one of the few states without a personal or corporate state income tax. In 2005, Texas was among one of the lowest per capita tax states in the nation (ranking 49th in per capita state taxes, or $1,434 per person.) Statistics show state and local taxes consume a smaller proportion of Texans' incomes (9.4%) than the national average (10.6%)

State Corporate and Personal Income Tax
Texas does not have a state personal income tax! An additional benefit came in 2005, when the IRS allowed individuals to deduct either their state income tax or local sales taxes paid in 2005. Because Texas doesn't have an income tax, Texas residents were able to deduct their sales taxes on their federal tax return.

Texas Franchise Tax
Corporations, limited liability companies, partnerships, professional associations, joint ventures and other legal entities are subject to the Texas Franchise Tax. Sole proprietorships and general partnerships (owned by "natural persons") are not subject to the Franchise Tax.

Rate
The Franchise Tax rate for most taxpayers is 1.0 percent of the Tax Base (Margin) described below. For entities primarily engaged in retail trade (Division G of the 1987 SIC Manual) or wholesale trade (Division F of the 1987 SIC Manual), the rate is 0.05 percent. The E-Z filing rate is 0.0575 percent.

Tax Base (Margin)
The Tax Base (Margin) will be the lowest of the three options below, times the apportionment factor:

  • 70 percent of total revenue
  • Total revenue minus Cost of Goods Sold
  • Total revenue minus Compensation

Apportionment of Tax Base (Margin)
The amount of revenue attributable to Texas for Franchise Tax purposes is determined by dividing the Texas gross receipts by the total gross receipts of the firm.

Discounts
Small firms qualify for the following discounts, based on total revenue:

  • More than $300,000, but less than $400,000 - 80% tax due
  • More than $400,000, but less than $500,000 - 60% tax due
  • More than $500,000, but less than $700,000 - 40 % tax due
  • More than $700,000, but less than $900,000 - 20 % tax due

Credits
Firms that were subject to Franchise Tax on May 1, 2006 may claim the following credits:

  • Installments or carryover from Economic Development Credits
  • Carryover of Business Loss Credits

Reporting
The initial report is due 1 year and 89 days after commencement of operations; thereafter annual reports are due on May 15. The annual report will cover the accounting year ending in the calendar year prior to the report year.

No tax is due for entities with total revenue of $434,782 or less or entities that calculate a tax liability of less than $1,000. All taxable entities are required to file a report, regardless of the amount of tax owed.

Taxable entities with total revenue of less than $10 million may elect to pay the franchise tax using the E-Z computation method (total revenue x apportionment factor x 0.575 percent).

Combined reporting is required for "affiliated groups" in which:

  • 50 percent interest is owned by a common owner or owners
  • Members of the group are engaged in a unitary business.

Unemployment Insurance Tax
Unemployment Insurance (UI) is a federal-state program jointly financed through federal and state employer payroll taxes (federal/state UI tax). Generally, employers must pay both state and federal unemployment taxes if: (1) they pay wages to employees totaling $1500 or more, in any quarter of a calendar year; or (2) they had at least one employee during any day of a week during 20 weeks in a calendar year, regardless of whether or not the weeks were consecutive.

Federal Unemployment Tax Act
The Federal Unemployment Tax Act (FUTA), authorizes the Internal Revenue Service to collect a federal employer tax used to fund state workforce agencies. Employers pay this tax annually by filing IRS Form 940. FUTA covers the costs of administering the UI and Job Service programs in all states. In addition, FUTA pays one-half of the cost of extended unemployment benefits (during periods of high unemployment) and provides for a fund from which states may borrow, if necessary, to pay benefits.

Federal Tax Rate
The FUTA tax rate is 6.2% of taxable wages. The taxable wage base is the first $7,000 paid in wages to each employee during a calendar year. Employers who pay the state unemployment tax, on a timely basis, will receive an offset credit of up to 5.4% regardless of the rate of tax they pay the state. Therefore, the net FUTA tax rate is generally 0.8% (6.2% - 5.4%), for a maximum FUTA tax of $56.00 per employee, per year (.008 X $7,000. = $56.00). State law determines individual state unemployment insurance tax rates.

New Texas Employer Tax Rates
New employers who do not acquire an existing business start at a tax rate of 2.7% or the applicable industry average tax rate, whichever is higher. The industry average is based on the North American Industry Classification System (NAICS). The employer will keep the entry-level tax rate for approximately 18 months and will continue to pay at this rate until the employer's account is chargeable with claims for unemployment benefits for four complete quarters. This period generally extends six calendar quarters from the date that first wages are paid, but can be as long as eight quarters. At the end of this period and for each year thereafter, the employer's tax rate is computed based upon the amount of unemployment insurance benefits former employees receive along with a number of statewide factors. This computed rate is called the employer's Effective Tax Rate. In Texas, 62% of employers pay the minimum rate of .22% and 3% of employers pay the maximum rate of 6.22%.

Experience Texas Tax Rate Formula
Sum of General Tax Rate + Replenishment Tax Rate + Employment and Training Investment Assessment

Note: Prior years could also include Deficit Tax Rate.

  • Unemployment Insurance Texas Tax Rates Historical Tax Rate Information
    Year
    Taxable Wage Base
    Minimum Tax Rate
    Maximum Tax Rate
    Average Tax Rate
    Average Experience Tax Rate
    2008
    $9,000
    0.22%
    6.22%
    0.98%
    0.77%
    2007
    $9,000
    0.29%
    7.70%
    1.30%
    1.13%
    2006
    $9,000
    0.40%
    7.64%
    1.51%
    1.37%
    2005
    $9,000
    0.58%
    8.02%
    1.74%
    1.63%
    2004
    $9,000
    0.67%
    8.26%
    1.74%
    1.64%
    2003
    $9,000
    0.67%
    8.47%
    1.68%
    1.56%
    2002
    $9,000
    0.30%
    6.54%
    1.03%
    0.85%
    2001
    $9,000
    0.24%
    6.24%
    0.94%
    0.75%
    2000
    $9,000
    0.30%
    6.30%
    1.02%
    0.85%
    1999
    $9,000
    0.24%
    6.24%
    1.02%
    0.83%
    1998
    $9,000
    0.27%
    6.27%
    1.12%
    0.93%

Worker's Compensation
Insurance companies generally use the payroll, employer classification and experience record and number of accidents and severity of injuries included for the employer to determine the premiums. Workers compensation taxes are based on each $100 of payroll. The rates range from $250 to unlimited (for new firms with no experience rating). In Texas, companies that do not have inter-state ratings will be eligible for an experience modifier beginning the 3rd year of operations.