Navigating Your Taxes: A Guide for New Small Business Owners in Texas

Starting a business is an exciting venture, and understanding your tax obligations is critical to long-term success. As a new small business owner in Texas with several employees, you’ll need to navigate federal and state tax requirements. This guide will help you understand the key considerations for managing your Texas business taxes and filing small business tax returns in Texas.

Choosing Your Business Entity’s Federal Tax Status

One of the most important decisions impacting your federal tax filing is your business’s entity structure. This choice determines how income and losses are reported and taxed. Standard federal tax classifications for businesses include Sole Proprietorship, Partnership, C Corporation, and S Corporation. While Texas allows various legal structures like LLCs, the federal tax classification significantly dictates your filing process.

Sole Proprietorship:

If you operate your business directly or through a single-member LLC (which is disregarded for tax purposes), the business itself is not taxed separately. Instead, your business income and losses are reported directly on your personal federal income tax return (Form 1040) using Schedule C, Profit or Loss From Business. As the owner, you would generally be responsible for paying self-employment taxes (Social Security and Medicare taxes) on the business’s net earnings. Given your $1 million revenue and employees, liability protection is likely a significant concern, which often leads business owners to choose a legal entity like an LLC. However, the federal tax treatment depends on elections made.

Partnership:

If your business has two or more owners and is classified as a partnership (or a multi-member LLC taxed as a partnership), the entity acts as a “flow-through” entity. The partnership files an informational return (Form 1065) reporting its income, gains, losses, and deductions, but the partnership itself does not pay income tax. Instead, each partner receives a Schedule K-1 detailing their share of these items, which they then report on their individual income tax returns. Partners in a partnership are commonly responsible for self-employment tax on their distributive share of the business income, with some exceptions for certain types of income or for limited partners.

C Corporation:

A C-corp is a separate legal entity that is taxed on its net income at the corporate level. The 2017 Tax Cuts and Jobs Act (TCJA) permanently reduced the corporate tax rate to a flat 21%. If the corporation distributes earnings to its shareholders as revenue dividends, those dividends are again taxed at the shareholder level, resulting in potential “double taxation”. Losses generated by a C corporation generally do not flow through to shareholders but may be carried forward to offset future corporate income.

S Corporation:

An S corporation is another entity choice that avoids the double taxation of a C corporation by generally operating as a flow-through entity. Like partnerships, S corporations report their income, gains, losses, and deductions, which then flow through to the shareholders who report them on their individual returns. A key difference from partnerships is that S corporation shareholders who also work for the business can be paid a “reasonable salary” subject to Federal Unemployment Tax Act (FUTA) or Social Security and Medicare taxes (FICA). The remaining business profits distributed to shareholder-employees are generally not subject to self-employment tax. S corporations have specific eligibility requirements, such as limitations on the number and type of shareholders and having only one class of stock with the same economic rights.

Your choice of entity and its federal tax classification will significantly impact your overall tax liability and filing complexity. Consulting with a PriorTax dedicatd tax professional is crucial to determine the most advantageous structure for your specific circumstances.

Texas State Tax Considerations

When it comes to Texas business taxes, the landscape differs from states with individual income taxes. Texas does not impose a state individual income tax. However, businesses operating in Texas may be subject to other state taxes.

Information regarding the specific types and thresholds of Texas state business taxes, such as the Texas franchise tax also referred to as the “margin tax”. Generally, this tax applies to entities like corporations, LLCs, and partnerships with revenue above a certain threshold. It is based on a business’s “margin,” calculated in one of several ways. It is important for business owners in Texas to understand the applicable state taxes beyond income tax. You should consult with a PriorTax dedicated tax professional for specific guidance on Texas business taxes. State and local tax considerations are an important factor when choosing a business entity.

Managing Employee Taxes and Benefits

As an employer, you have responsibilities related to your employees’ taxes. You are required to pay employment taxes, including Medicare taxes and Social Security taxes, on cash wages paid to your employees above certain thresholds. These are generally referred to as FICA taxes. You are also responsible for withholding federal income tax from employee wages based on the information provided on their W-4 forms.

Providing employee benefits, such as health insurance, can have tax implications. Offering group health insurance coverage for your employees, including a self-employed owner paid as an employee (like in an S corporation), can be a tax-advantaged way to provide benefits. Qualified retirement plans, such as SEP IRAs (for the self-employed) or 401(k)s, offer significant tax benefits, including deductible contributions for the business and tax-deferred growth for the employee. Contributions to these plans can reduce the business’s taxable income.

Other Important Tax Considerations for Your Business

Estimated Business Taxes in Texas:

Depending on your business structure, you may need to pay estimated federal income taxes throughout the year. This is required if you expect to owe $1,000 or more in taxes and your income is not subject to sufficient withholding. Estimated taxes are typically paid quarterly. For high-income taxpayers, withholding and estimated payments may need to equal at least 110% of the prior year’s tax liability to avoid penalties. Estimated tax calculations should also include potential liability for the Net Investment Income Tax (NIIT) and the additional Medicare tax if applicable.

Business Expenses:

Keeping meticulous records of your business expenses is essential for claiming proper tax deductions. Business expenses such as employee salaries and wages paid to employees, insurance premiums, rent, utilities, and supplies are generally deductible if they are ordinary and necessary for your business. Specific rules apply to certain expenses like business meals (generally 50% deductible) and the use of vehicles for business. Documenting the business purpose of expenditures is crucial.

Depreciation and Expensing:

When you purchase assets for your business, such as equipment or machinery, you can recover their cost over time through depreciation deductions. Bonus asset depreciation and Section 179 expensing allow businesses to tax deduct a significant portion, or even the full cost, of eligible property in the year it’s placed in service, accelerating tax savings. However, bonus depreciation is scheduled to phase down after 2026.

Recordkeeping:

Maintaining organized and accurate records of all income and expenses is fundamental for filing accurate small business tax returns in Texas and nationally. Good records also support deductions and can be critical if your business is ever audited.

The Impact of Upcoming Tax Law Changes

Many provisions enacted by the TCJA in 2017 are scheduled to expire at the end of 2025, which could significantly impact both individual and business tax liabilities starting in 2026. For a business owner, potential changes include:

Individual Income Tax Rates:

The current individual marginal tax rates, including the top rate of 37%, are set to revert to the higher pre-TCJA rates, with a top rate of 39.6%. This would increase the tax burden on income from flow-through entities (Sole Proprietorships, Partnerships, S Corporations).

Qualified Business Income (QBI) Deduction:

The 20% deduction on qualified business income from pass-through entities (Section 199A), a significant benefit for many business owners, is scheduled to expire after Dec. 31, 2025. Losing this deduction would increase the taxable income for owners of these entities.

Itemized Deductions:

Several itemized deduction limitations enacted by the TCJA are set to expire. For example, the $10,000 cap on state and local tax (SALT) tax deductions is scheduled to expire. While beneficial for those who itemize, the return of the “Pease limitation” could limit the benefit of itemized deductions for high-income or high networth taxpayers.

Alternative Minimum Tax (AMT):

Modifications to the AMT that increased exemption amounts and phaseout thresholds are scheduled to expire, potentially expanding the reach of the AMT to more taxpayers.

These potential changes highlight the importance of tax planning in 2025. The political landscape and the outcome of the November 2024 elections will significantly influence whether these provisions are extended, modified, or allowed to expire. It is recommended that legislative developments be monitored closely and that you work with your tax advisor to analyze the potential impact on your business and personal tax situation.

PriorTax Dedicated Tax Professional Support

Successfully managing your small business tax returns in Texas requires understanding your entity’s federal tax classification, complying with federal employment tax rules, navigating applicable Texas business taxes, and maintaining diligent recordkeeping. The potential expiration of key TCJA provisions at the end of 2025 adds another layer of complexity and underscores the need for proactive planning. Consulting with a dedicated tax professional who can provide advice tailored to your business structure, revenue level, employee situation, and location in Texas is invaluable. They can help you make informed decisions to optimize your tax position and ensure compliance with all filing requirements.

This entry was posted on Thursday, June 5th, 2025 at 8:00 am and is filed under Tax and Life Changes, Tax Deductions and Credits, Tax for Business, Tax Tips and Tricks. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.