Texas LLC tax filing 2026: federal Schedule C, franchise tax report, and sales tax — how they fit together

A single-member Texas LLC is a disregarded entity for federal tax purposes by default. The IRS doesn’t recognize the LLC as a separate taxpayer — the LLC’s income, deductions, and credits flow through to the owner’s personal Form 1040. The owner files Schedule C (Profit or Loss from Business) to report the LLC’s business activity. Self-employment tax (Schedule SE) applies to the net profit, calculated at 15.3% on earnings up to the Social Security wage base ($184,500 for 2026, adjusted annually) and 2.9% above the wage base. The owner also pays personal income tax on the net profit at ordinary rates.

There’s an exception if the single-member LLC elects to be taxed as a corporation. The election is made on Form 8832 (Entity Classification Election) for C-corp treatment or, with an additional Form 2553, for S-corp treatment. With a C-corp election, the LLC files Form 1120 and pays corporate tax at 21% (federal). With an S-corp election, the LLC files Form 1120-S, the owner takes a salary on W-2 (subject to payroll tax), and remaining profits flow through to the owner’s personal return on Schedule K-1. The S-corp election is what most owners are considering when they hear about “electing S-corp.”

Without an election, the federal calendar is simple. The LLC owner files Form 1040 with Schedule C and Schedule SE by April 15 (or extends to October 15 with Form 4868). The LLC itself files nothing at the federal level — the IRS treats it as nonexistent. Estimated tax payments are required if the owner expects to owe $1,000 or more in tax for the year, paid quarterly on April 15, June 15, September 15, and January 15 of the following year. The estimates cover both income tax and self-employment tax. Missing estimated payments triggers an underpayment penalty calculated on Form 2210.

Common mistake: filing a separate federal return for the single-member LLC. There isn’t one for disregarded entities. We’ve seen new owners try to file a Form 1065 (partnership) for their single-member LLC, which the IRS rejects, or file a Form 1120 (corporation) without making an election, which the IRS treats as an implicit election to be taxed as a corporation going forward. The cleanup requires filing a corrected return and possibly Form 8832 with retroactive effect, which has rules. The default is Schedule C unless you elect otherwise.

Real example with dollar amounts: a freelance consultant in Austin operates as a single-member LLC with $150,000 in revenue and $120,000 in net profit after deductions. She files Form 1040 with Schedule C showing the $120,000 profit. Schedule SE calculates self-employment tax: 15.3% on the first $168,600 (or $120,000 in her case, since she’s below the wage base) = roughly $18,360 in SE tax, with half deductible as an adjustment to income. Her federal income tax on the remaining net is calculated at her marginal rate. Total federal tax burden roughly $32,000 to $36,000 depending on other personal income, deductions, and credits. No separate federal LLC return required.

Documentation: maintain separate bank accounts and credit cards for the LLC to support the deductions claimed on Schedule C. The IRS doesn’t require it, but commingling personal and business expenses creates audit risk and makes the bookkeeping harder. Keep receipts for at least three years from the filing date (six if you understate income by more than 25%, indefinitely if fraud is alleged). Mileage logs for business vehicle use. Home office records if you claim the home office deduction. Estimated tax payment confirmations from the IRS direct pay system or your check copies. We also recommend keeping the LLC’s operating agreement and formation documents in the same file, even though they’re not federally required.

Audit consideration: single-member LLCs filing Schedule C have higher audit rates than W-2 employees because Schedule C income isn’t reported by a third party (no W-2 cross-check). The IRS pays more attention to home office deductions, vehicle expenses, meals, and large miscellaneous deductions. Reasonable, documented deductions with supporting receipts almost always survive audit. Aggressive deductions without documentation get reversed. The audit conversation usually focuses on the substantiation, not on whether the deduction was theoretically allowed.

Where The Reed Corporation adds value: we prepare Form 1040 with Schedule C and Schedule SE for single-member Texas LLC owners as part of our individual tax service. The federal preparation coordinates with the Texas franchise tax filing (separate from the federal return) and with sales tax compliance if applicable. We also evaluate the S-corp election annually as the LLC’s profit grows — the election typically makes sense around $80,000 to $100,000 in net profit and definitely makes sense above $150,000. For Texas-based clients, the S-corp election doesn’t affect the franchise tax but can reduce federal self-employment tax meaningfully. Our business tax return service handles the federal filing and the annual entity-type review.

Texas franchise tax applies identically to single-member and multi-member LLCs. The Comptroller doesn’t distinguish based on membership count. Both file the same franchise tax report (Form 05-158 long form, Form 05-169 EZ form, or Form 05-163 No Tax Due Report) by May 15 each year. Both file the same Public Information Report (Form 05-102). Both are subject to the same revenue thresholds, tax rates, and calculation methods. The federal entity classification (disregarded, partnership, S-corp, C-corp) doesn’t change Texas franchise tax treatment.

Where the federal classification does matter is in how revenue and deductions are calculated. The franchise tax is calculated on “total revenue,” which for an LLC taxed as a partnership is the revenue shown on Form 1065 (line 1c, gross receipts, plus other income items). For a single-member disregarded LLC, total revenue is the revenue shown on Schedule C. For an LLC taxed as an S-corp, it’s the revenue on Form 1120-S. The starting point is the federal return, then Texas applies its own adjustments. Most adjustments are minor for typical operating businesses; they get more involved for holding companies, real estate entities, and businesses with passive income.

The franchise tax calculation has four methods, and you take the lowest result of the four: total revenue minus cost of goods sold; total revenue minus compensation (with caps); total revenue times 70%; total revenue minus $1 million. The result is your “taxable margin.” Apply the tax rate (0.375% for retail/wholesale, 0.75% for everything else, or 0.331% under the EZ method) to the margin. For small LLCs under the $2.65 million No Tax Due threshold for 2026, none of this calculation matters — you file the No Tax Due Report and owe zero.

Common mistake: assuming the federal pass-through treatment exempts the LLC from Texas franchise tax. It doesn’t. The franchise tax is an entity-level tax on the LLC itself, regardless of how the LLC is taxed federally. Multi-member partnership LLCs sometimes assume that because the partnership pays no federal income tax, there’s no entity-level Texas obligation either. Wrong. The Texas franchise tax exists separately and applies to the LLC entity.

Real example with dollar amounts: a multi-member LLC with three members operates a software consulting business in Austin. Total revenue for 2026 is $1.8 million. The LLC files Form 1065 federally, issues K-1s to each member, and the members report their shares on their personal returns. For Texas franchise tax, $1.8 million is below the $2.65 million No Tax Due threshold, so the LLC files Form 05-163 and owes $0 in franchise tax. Now contrast with a similar LLC at $3.5 million in revenue: above threshold, files Form 05-158, calculates margin (say $2.4 million after COGS), applies 0.75% rate = $18,000 franchise tax due. Same federal partnership treatment for both LLCs, but very different Texas outcomes based on revenue alone.

Documentation: keep the federal partnership return (Form 1065) or the single-member’s Schedule C with the Texas franchise tax filing. The Comptroller can request the federal return as part of any examination. Also keep the supporting workpapers showing how you calculated total revenue, COGS, compensation, and margin. Multi-member LLCs should keep the partnership operating agreement and the basis schedules for each member (relevant if the IRS audits the federal return, which can affect the Texas calculation). The Comptroller’s record retention requirement is four years from the filing date.

Audit consideration: Texas franchise tax audits are less frequent than federal audits but more focused. The Comptroller typically picks specific industries or specific tax positions to review (the COGS calculation is a common focus, the compensation cap is another). Multi-member LLCs with significant guaranteed payments to partners get attention because the federal treatment of guaranteed payments (deductible to the partnership, ordinary income to the partner) interacts with the Texas compensation deduction in non-obvious ways. Single-member LLCs taxed as disregarded entities have simpler franchise tax calculations and fewer audit triggers.

Where The Reed Corporation adds value: we prepare the Texas franchise tax report and the federal partnership return (or Schedule C, or Form 1120-S) as a coordinated workflow. The franchise tax filing is due May 15, and we use the federal numbers as the starting point. For multi-member LLCs, we also reconcile the K-1s to the franchise tax revenue calculation to make sure both filings tell the same story. For LLCs growing toward or past the $2.65 million No Tax Due threshold, we model the franchise tax in advance so the owner isn’t surprised at filing time. Our Texas business owners service includes the franchise tax filing as part of the regular cycle.

An S-corp election for a Texas LLC starts making sense when net profit (after a reasonable owner salary) clears roughly $80,000 to $100,000 per year. Below that, the costs and complexity of running an S-corp typically outweigh the self-employment tax savings. Above $150,000 in net profit, the election almost always saves money. The election is at the federal level only — Texas doesn’t recognize an “S-corp” structure separately, so the Texas franchise tax treatment is unchanged. The election only affects federal self-employment tax (and indirectly, federal payroll tax).

The math works like this. Without the election, all net profit from the LLC is subject to self-employment tax (15.3% up to the Social Security wage base, 2.9% above). With the election, the owner takes a salary (subject to FICA at 15.3% combined employer/employee), and remaining profits flow through as distributions free of self-employment tax. So if the LLC nets $200,000, without the election the owner pays SE tax on essentially all of it (about $25,000 in SE tax after the half-deduction adjustment). With the election, the owner takes a $90,000 salary (paying $13,770 in payroll tax) and takes $110,000 in distributions (no SE tax). Total payroll tax: about $13,770. Net savings: roughly $11,000 per year.

How to make the election: file Form 2553 (Election by a Small Business Corporation) with the IRS. If you want the election effective for the current calendar year, file by March 15 of that year (or within 75 days of the entity’s formation if newly formed). Late elections can sometimes be made under Revenue Procedure 2013-30, which provides relief for taxpayers who filed late with reasonable cause. The election requires all members of the LLC to consent. If the LLC is taxed as a partnership at the time of election (multi-member), the partnership terminates and the LLC becomes an S-corp going forward.

Common mistake: making the election and then not running payroll. Once you’ve elected S-corp status, you can’t take draws anymore — you must take a salary subject to payroll tax. Owners who elect S-corp and continue paying themselves through owner draws (no W-2, no payroll tax) get challenged by the IRS for failing to take reasonable compensation. The penalty is reclassification of distributions as wages, with payroll tax assessed plus penalty and interest. The IRS has won numerous cases on this point (Watson v. United States is the most-cited example). Reasonable compensation is required.

Real example with dollar amounts: an Austin-based marketing agency LLC nets $250,000 per year. The owner elects S-corp status effective January 1, 2026. She takes a $110,000 salary (reasonable for a marketing agency owner with her experience and the agency’s size, supported by industry comp surveys). Payroll tax on the salary is roughly $16,830 (employer portion). Distributions for the year are $140,000, subject to ordinary income tax but not SE tax. Compared to the disregarded LLC scenario (where she’d pay roughly $25,000 in SE tax after the half-deduction), her savings net of payroll setup costs ($2,000/year for our service plus payroll software) is about $6,000 to $8,000 per year. Not huge, but recurring.

Documentation: for S-corp LLCs, you need a Form W-2 for the owner’s salary, payroll tax filings (Form 941 quarterly, Form 940 annually, plus Texas Workforce Commission state filings), corporate minutes documenting reasonable comp decisions, a separate Form 1120-S federal return annually, and Schedule K-1 to the owner showing distributions and pass-through income. Reasonable compensation documentation is the most important piece. The IRS will look at the salary you took versus industry standards and the value of services you performed. Supporting documentation (industry comp surveys, the owner’s actual hours worked, the LLC’s profitability, the salary the LLC would pay an outsider to do the same job) protects against challenge.

Audit consideration: S-corp reasonable compensation is one of the IRS’s standard audit issues for closely-held S-corps. The IRS has specialized programs targeting low-salary S-corps. The challenge is usually: the auditor argues the salary should have been higher (more services performed, higher industry standard, etc.), they reclassify some distributions as wages, and they assess back payroll tax plus penalty and interest. Conservative reasonable comp (closer to fair market value for the services performed) is much harder for the IRS to challenge. We help clients document the comp decision and update it annually.

Where The Reed Corporation adds value: we evaluate the S-corp election annually for our Texas LLC clients as profit grows. The election decision involves modeling the SE tax savings, estimating payroll costs, evaluating reasonable comp, and considering the owner’s other income (which affects marginal rates and the effective benefit). We file Form 2553 with the IRS, coordinate the payroll setup (recommending payroll providers we work with), prepare Form 1120-S annually, and handle the reasonable comp documentation. Our business tax return service covers the S-corp election analysis and ongoing compliance as a single workflow.

A Texas LLC needs a sales tax permit only if it sells taxable goods or taxable services. Selling pure professional services (legal, accounting, medical, consulting, financial advisory, architecture, engineering, most creative services) doesn’t require a permit. Selling tangible personal property always requires a permit. Selling one of the specific taxable services on the Comptroller’s list also requires a permit. The Texas entity type (LLC, sole prop, corporation, partnership) doesn’t affect whether the permit is required — the question is purely about what you’re selling.

The taxable services list in Texas is narrow and specific. Data processing services are taxable (computer services, data entry, web hosting in some configurations, SaaS in many configurations). Information services are taxable. Telecommunications services are taxable. Cable and satellite television services are taxable. Security services are taxable. Real property repair, remodeling, and restoration of nonresidential property is generally taxable. Landscaping and lawn care are taxable. Janitorial services are taxable. Motor vehicle parking and storage. Amusement services. The full list is in Comptroller publication 96-259.

Mixed offerings often surprise LLC owners. A consulting LLC that builds custom websites for clients might be selling “web hosting” (taxable as data processing) or “design services” (not taxable). The distinction depends on what the deliverable actually is. Pure design work delivered to the client (you hand over the files, they host elsewhere) is not taxable. Hosting on your servers (or your reseller account) is taxable. A consulting LLC that includes both delivery models in its offerings needs to separate the line items on invoices and collect sales tax only on the taxable portion.

Common mistake: assuming “I’m a service LLC, so no sales tax” without checking the taxable services list. We’ve seen software LLCs convince themselves their SaaS isn’t taxable in Texas, then face a multi-year audit that taxes the SaaS revenue back to the date of nexus. Texas’s position on SaaS has been consistent since the 1990s: software accessed over the internet that the customer doesn’t download is data processing, which is taxable. The 20% data processing exemption applies (you tax 80% of the charge), but you still need a permit and you still collect.

Real example with dollar amounts: a Houston-based LLC offers project management consulting at $200/hour and resells a project management SaaS tool at $50/user/month. The consulting revenue is $300,000/year (not taxable). The SaaS reseller revenue is $80,000/year (taxable as data processing, with the 20% exemption, so $64,000 is the taxable base). At Houston’s 8.25% combined rate, the LLC owes $5,280 per year in Texas sales tax on the SaaS reseller revenue. It needs a permit (Form AP-201), it files quarterly returns, and it tracks the SaaS line separately from the consulting line. Without the permit, the LLC accumulates back tax plus penalty and interest from the date the SaaS reseller revenue started.

Documentation: invoice line separation is the single most important practice for service LLCs with mixed taxable and non-taxable offerings. Each invoice should list the taxable services separately from the non-taxable services, with sales tax shown only on the taxable portion. Bundled charges with no separation are taxable in full under Comptroller policy — the burden is on the seller to demonstrate which portion isn’t taxable, and a single bundled line item makes that nearly impossible. Keep copies of customer contracts that show what’s being purchased. Keep your own records of how the work was performed (taxable versus non-taxable hours, if your engagement crosses both).

Audit consideration: service LLCs facing a sales tax audit usually have one of two problems. First problem: they didn’t realize they had a taxable service offering and never registered. The audit assessment covers all back periods, plus penalty and interest. Second problem: they registered but bundled taxable and non-taxable services on invoices without separation. The audit reclassifies bundled invoices as fully taxable and assesses tax on the bundled amounts. Either way, the cleanup is more expensive than getting it right from the start. The fix isn’t difficult once the issue is identified, but it requires going back through invoices and customer contracts to support the position on each historical sale.

Where The Reed Corporation adds value: we do a taxability review for every new Texas LLC client, especially service businesses. The review identifies which revenue streams are taxable, which aren’t, and where the lines blur. If you’re clearly outside the taxable services list, we tell you and we document why — you don’t need a permit, you don’t need to collect, and the analysis sits in your files in case the question comes up later. If you have any taxable revenue, we register you (Form AP-201), set up invoice templates that separate taxable from non-taxable line items, and coordinate with your accounting system to flag the right transactions. Our Texas business owners service includes the initial taxability review as standard.

The Texas franchise tax and the federal income tax are two completely separate tax systems, administered by two different agencies, filed on two different forms, with two different due dates. The federal income tax is administered by the IRS, filed annually on Form 1040 (with Schedule C for single-member LLCs), Form 1065 (for multi-member partnership LLCs), Form 1120-S (for S-corp LLCs), or Form 1120 (for C-corp LLCs). The Texas franchise tax is administered by the Texas Comptroller, filed annually on Form 05-158, 05-169, or 05-163 by every LLC formed in Texas or doing business in Texas, due May 15.

The two taxes use different starting points. Federal income tax starts from gross income and applies deductions to arrive at taxable income, then applies federal rates. The Texas franchise tax starts from “total revenue” (which is close to but not identical to gross income) and uses one of four calculation methods to arrive at “taxable margin,” then applies the Texas rate (0.375%, 0.75%, or 0.331% under the EZ method). The federal income tax taxes the owner (for pass-through LLCs) or the entity (for C-corp LLCs). The Texas franchise tax always taxes the LLC entity itself, regardless of federal classification.

The federal tax depends on how the LLC is classified. A disregarded entity passes income through to the owner’s Schedule C. A partnership passes income through via K-1s to the members. An S-corp passes income through on K-1s but also requires the owner to take a salary. A C-corp pays tax at the entity level. The Texas franchise tax doesn’t care — it’s the same calculation regardless of federal classification. This is why Texas LLCs that elect S-corp status get no Texas tax benefit from the election (the federal SE tax savings are real, but Texas tax doesn’t change).

Common mistake: thinking that filing the federal return covers the Texas obligation. It doesn’t. Filing Form 1065 with the IRS doesn’t tell the Texas Comptroller anything. The Comptroller has its own filing requirement (Form 05-158 or 05-163 plus the Public Information Report Form 05-102), its own deadline (May 15), and its own penalty structure for late filing. The two systems don’t talk to each other in any meaningful way for most LLCs. You file with the IRS, then you file with the Comptroller, then (if applicable) you file sales tax returns separately.

Real example with dollar amounts: an Austin LLC has $1.5 million in revenue and $300,000 in net profit for 2026. Federally, the owner (single member) files Form 1040 with Schedule C showing $300,000 profit, pays SE tax of about $20,000 (after the half-deduction and SS wage base cap), and pays federal income tax at the owner’s marginal rate (roughly $85,000 to $90,000 depending on other income). Texas franchise tax: total revenue is $1.5 million, below the $2.65 million No Tax Due threshold, so the LLC files Form 05-163 and owes $0 in franchise tax. Two separate filings, two different calculations, two different deadlines. The federal tax cost is roughly $105,000 to $110,000. The Texas franchise tax cost is $0. But both filings must be done.

Documentation: keep federal and state filings in separate folders or properly tagged in your records. The IRS examination process and the Texas Comptroller’s audit process are different, and the records they want overlap but aren’t identical. Federal documentation: receipts, bank statements, mileage logs, payroll records, depreciation schedules, basis records for partners. Texas documentation: revenue support, cost of goods sold records, compensation records (for the compensation deduction method), franchise tax workpapers. Keep both for the longer of the two statutes of limitations (six years to be safe).

Audit consideration: federal audits and Texas audits can happen independently or together. A federal audit doesn’t trigger a Texas audit automatically, though significant federal adjustments will eventually surface in Texas filings (the federal numbers feed the Texas calculation). A Texas audit doesn’t trigger federal. The two agencies don’t share information automatically, though both can request information from the other in specific situations. Being clean on one doesn’t protect you on the other. Most Texas LLCs go years without either kind of audit, but the cleaner your records, the lower the friction if either happens.

Where The Reed Corporation adds value: we prepare both the federal return and the Texas franchise tax report as a coordinated workflow. The federal numbers feed the Texas calculation, and we run the calculations side by side to keep them consistent. For LLCs approaching the $2.65 million No Tax Due threshold, we model the franchise tax in advance so the May 15 filing isn’t a surprise. For LLCs considering an S-corp election, we explain that the election only affects federal SE tax — not Texas tax — so the analysis stays focused on federal savings. For multi-state LLCs (Texas plus other states), we coordinate the state filings as a single workflow. Our business tax return service handles both federal and Texas filings together.