7 Things to Know About Taxes in Texas

What Makes Texas Unique When it Comes to Taxes?

Texas is widely regarded as one of the most tax-friendly states in the U.S.—a reputation that stems from its bold decision to forgo both personal income tax and a traditional corporate income tax. This structural tax policy, enshrined in the state constitution, positions Texas as a magnet for entrepreneurs, investors, and high-income earners seeking to maximize take-home profits and operational efficiencies.

Instead of taxing income, Texas leans heavily on property taxes and sales taxes to fund state and local services. This shift in structure results in a competitive advantage for many businesses and households, especially compared to high-tax coastal states like California and New York.

Additionally, Texas consistently ranks in the top five states for business climate, due in part to its tax model, regulatory simplicity, and lack of red tape around business formation.

What Are the State Income Tax Rules in Texas?

Texas does not levy a personal income tax on residents. This means individuals earning wages, salaries, or business income within the state are not required to pay any state income tax. The result is an immediate bump in net pay compared to similarly compensated workers in states with high income tax rates.

However, it’s important to note that Texas still follows federal income tax guidelines. Residents must file with the IRS, but there is no corresponding state filing requirement for individual income.

The absence of income tax also means:

• No state-level capital gains tax

• No state tax on Social Security benefits

• No tax on pension or retirement income

The state fills its revenue gap with property taxes, sales taxes, and specific business taxes—most notably, the franchise tax.

What Taxes Do I Pay in Texas?

Even without personal income tax, Texas residents and businesses still contribute to state and local government through other taxes:

1. Sales Tax

• State rate: 6.25%

• Local add-ons: Up to 2%, depending on municipality

• Combined rate: Can reach as high as 8.25%

Sales tax applies to most retail purchases and some services. Texas does not tax groceries, prescription drugs, or some services like residential rent.

2. Property Tax

• Texas has no state-level property tax, but local governments impose relatively high property taxes to fund schools, infrastructure, and emergency services.

• Texas ranks in the top 10 states for highest average property tax rates, with an effective rate near 1.6% depending on the county.

3. Franchise Tax

• Also known as the margin tax, this is the closest thing Texas has to a corporate income tax.

• Applies to most for-profit entities earning more than $2.47 million annually (2024 threshold).

• Calculated on gross revenue minus allowable deductions, at rates ranging from 0.375% to 0.75%.

4. Unemployment Insurance Tax

• Required for employers with one or more employees.

• Paid quarterly and used to fund unemployment benefits in the state.

How Much is $100,000 in Salary After Taxes in Texas?

Let’s break down the take-home pay on a $100,000 salary for a single filer living in Texas:

Tax Type Estimated Amount Federal Income Tax ~$13,300 FICA (Social Security + Medicare) ~$7,650 State Income Tax $0 Total Tax ~$20,950 Estimated Net Pay ~$79,050

These estimates are based on 2024 IRS brackets, standard deductions, and no additional withholding or deductions. The major benefit is the $0 in state income tax, which gives Texas residents a sizable bump in disposable income compared to residents of high-tax states.

Advantages for Businesses

Texas offers a favorable tax environment for both startups and established companies. Key benefits include:

• No Corporate Income Tax: Instead, qualifying entities pay the simplified franchise tax.

• Lower Cost of Operations: No state income tax on pass-through income means business owners keep more of their profits.

• Access to Incentives: Texas provides sales tax exemptions for manufacturing equipment, research and development, and business relocation.

• Growing Economy: As of 2023, Texas' gross state product surpassed $2.35 trillion, placing it 9th globally if it were a country. (Source: BEA, 2023)

Texas is also home to a booming tech and logistics sector, further driven by the low-tax ecosystem.

Common Misconceptions

Despite the hype, there are a few myths to clear up:

• “Texas has no business taxes.” While there’s no income tax, the franchise tax still applies to many companies based on revenue—not profit.

• “Living in Texas means everything is cheaper.” While tax savings are real, property taxes and insurance rates are often higher than in states with income taxes.

• “All small businesses are exempt from taxes.” Only those below the no-tax revenue threshold (~$2.47M in 2024) are exempt from paying the franchise tax.

• “Texas doesn’t regulate businesses.” Texas is business-friendly, not regulation-free. You still need licenses, zoning permits, and must follow federal and state employment laws.

Things to Watch For

Despite its benefits, doing business in Texas comes with considerations:

• High Property Taxes: For companies owning land or buildings, annual property tax bills can be significant.

• Complex Local Tax Codes: Different cities and counties have varying rates and rules for sales and property taxes.

• Franchise Tax Confusion: New business owners often underestimate their potential liability. Consult a tax advisor early.

• Nexus Rules for Remote Businesses: Even if your company is online, having a remote employee in Texas may trigger franchise tax obligations.

Final Thoughts

Texas remains one of the most advantageous states for business and personal wealth building. But while the lack of income tax is a major headline, the total tax picture is more nuanced. Understanding how sales, property, and business taxes interact will allow you to plan proactively, stay compliant, and maximize the benefits the Lone Star State has to offer.

For entrepreneurs, founders, and executives considering Texas as a base of operations—it's essential to get strategic early. Tax efficiency can be a powerful tool when paired with sound legal structure, financial forecasting, and good recordkeeping.

If you'd like, I can also prepare an embedded infographic or data visual showing the difference in net income between Texas and other major states.