Yearly, business owners in Texas deal with the consequences of making common tax mistakes, including audits, hefty penalties, interest on unpaid taxes, and even tax evasion charges. An improved understanding of Texas tax laws gives business owners a clear path to avoiding the most common tax mistakes.
1. Failing to charge sales tax on certain products and services
In Texas, business owners are required to collect sales tax on certain products and services and remit these taxes to the Texas Comptroller. However, there are several areas where businesses commonly make mistakes:
Products: In Texas, products are classified as taxable and non-taxable. A list of these products is published by the Texas Comptroller. However, businesses can sometimes misclassify their products and end up not collecting sales tax on these items.
Services: In Texas, not all services are exempt from sales tax. The Texas Comptroller has published a list of nineteen taxable services. However, each category of service has its own tax criteria that service businesses need to take note of. For example, in the category of ‘information services,’ only 20% of the charge for information services is exempt from tax.
Other mistakes made by Texas businesses include:
Failing to register for a Texas Sale Tax Permit.
Forgetting to remit sales tax to the Texas Comptroller on time.
Ignoring use tax obligations for items purchased tax-free and used in the business.
Being unaware that online sales in Texas in excess of $500,000 per annum triggers economic nexus rules. Once this threshold is surpassed, even remote businesses are required to register for a Texas sales tax permit, collect sales tax on taxable items sold to Texas customers, and remit the collected tax to the Texas Comptroller.
For a more detailed understanding of sales tax obligations, refer to Sales Tax in Dallas: A Quick Guide
2. Ignoring franchise tax requirements
In Texas, the term ‘franchise tax’ can be confusing for business owners, but franchise tax is a privilege tax imposed on businesses operating in the state. Some common mistakes that business owners make under this category are:
Believing that they are not liable for franchise tax because Texas has no personal income tax obligation
Assuming their business is under the ‘no-tax’ threshold means that they have no filing obligations. As of 2025, form (Form 05-163) has been discontinued, providing relief for businesses with zero tax. However, entities must still file the Public Information Report (Form 05-102), or the Ownership Information Report (Form 05-167).
Miscalculating taxable margins on your tax bill due to unfamiliarity with deduction methods (e.g., cost of goods sold, compensation deduction).
For more information on franchise tax obligations for Texas, refer to What is Texas Franchise Tax? Quick Guide for SMEs
3. Misunderstanding federal vs. state taxes
Capital gains taxes
The lack of a state income tax in Texas often creates misunderstandings about how capital gains are taxed. While Texas itself does not impose a tax on capital gains, these gains are still subject to federal taxes. Taxpayers have been known to make the following capital gains mistakes:
Assuming that they do not need to pay any capital gains tax because they do business in Texas.
Failing to differentiate between short-term gains and long-term gains.
Errors in calculating the initial purchase price plus certain costs (basis), leading to overpayment or underpayment of taxes.
Miscalculating capital gains taxes, leading to audits and penalties.
Business owners who unknowingly neglect capital gains taxes can increase their tax burden when audited by the IRS, which can lead to substantial losses in a given tax year.
Other taxes
Texas may not impose a state personal tax on your taxable income or investment earnings. But there are plenty of other taxes that are due to the state, such as gasoline taxes, cigarette distributor's tax, crude oil tax, hotel occupancy tax, and the mixed beverage sales tax to name a few.
The Texas Comptroller publishes a comprehensive list of taxes, fees, and reports due dates for businesses.
A tax professional can help you work out a comprehensive financial plan and ensure that you are meeting federal, state, and local tax code obligations. The cost of taxation services are negligible in comparison with fines and penalties imposed by the IRS, or Texas Comptroller.
For more information on professional tax planning, contact Hall Accounting Company and speak to a Senior Associate.
4. Misclassifying workers
To save on employment taxes and help workers, Texas business owners sometimes classify workers as independent contractors. However, this can land both businesses and workers in trouble with federal and state regulators. Common errors in this category include:
Failing to pay unemployment insurance taxes for workers.
Neglecting to file proper tax forms for independent contractors.
Not withholding taxes for workers that are permanent full-time employees of the company, due to misclassification as contractors.
In Texas, several guidelines dictate the filing status of individual workers. IRS Publication 15-A: Employer's Supplemental Tax Guide provides the basis for worker identification.
Avoid costly tax mistakes in Texas
Businesses would do well to educate themselves on relevant federal, state, and local tax laws. Owners are sometimes confused by overlapping regulations and confusing instructions regarding Texas taxes vs. federal taxes.
This can ultimately affect the profitability of the business when penalties and fines are imposed for violating tax regulations - even if you’ve done so unknowingly.
One benefit of hiring a tax professional is that they will keep up to date with the tax regulations affecting your business, and they will use sophisticated accounting software that will help you automate sales tax, employee classifications, and franchise taxes.
This alone will save your business from giving away money in penalties and other fines. Work with a reputable company that has a few years experience in accounting and taxation, and is familiar with the industry you are operating in. If you’re looking for a reputable, experienced, and trustworthy business partner, Hall Accounting Company is ready to discuss your needs.