A sole proprietorship in Texas is taxed as part of the owner’s personal federal return: business profit is reported on Schedule C and hit with both federal income tax and 15.3% self-employment tax. Texas itself imposes no personal income tax and no franchise tax on sole proprietors, but the state collects sales tax on most goods and certain services, and county appraisal districts tax business equipment and inventory. That mix — heavy federal, light state, meaningful local — is what makes the total bill.
Federal Income Tax on Your Business Profit
Every sole proprietor reports business income and expenses on Schedule C, attached to Form 1040. The net profit at the bottom of Schedule C flows onto your personal return alongside wages, investment income, or anything else you earn. There is no separate business return.
Because all of that net profit is taxable, expense tracking pays off twice. Every legitimate deduction — supplies, advertising, vehicle costs, home office, health insurance premiums — reduces the income subject to both income tax and self-employment tax. Missing a few hundred dollars in deductions means overpaying on both.
For 2026, single filers pay 10% on the first $12,400 of taxable income and move through 12%, 22%, 24%, 32%, and 35%, reaching 37% above $640,600. Married couples filing jointly hit 37% at $768,700.1Internal Revenue Service. IRS Releases Tax Inflation Adjustments for Tax Year 2026
The 20% Qualified Business Income Deduction
Eligible sole proprietors can deduct up to 20% of qualified business income before calculating income tax. This Section 199A deduction, created by the Tax Cuts and Jobs Act, was made permanent in 2025.2Internal Revenue Service. Qualified Business Income Deduction
The full deduction is available up to certain income levels. For specified service businesses like law, accounting, consulting, and medicine, the deduction begins phasing out at $203,000 in taxable income for single filers and $406,000 for joint filers in 2026. Non-service businesses face separate limits tied to wages paid and property held above those same thresholds. Below those numbers, you generally take the full 20% without wading into phase-out calculations.
Self-Employment Tax
Self-employment tax is where new sole proprietors are most often surprised. When you work for an employer, Social Security and Medicare taxes are split 50/50 with the company. When you work for yourself, you pay both halves. The combined rate is 15.3%: 12.4% for Social Security and 2.9% for Medicare.3Internal Revenue Service. Self-Employment Tax (Social Security and Medicare Taxes)
Before the rate applies, your net earnings are multiplied by 92.35%. On $100,000 of net profit, self-employment tax applies to $92,350. The 12.4% Social Security portion only applies up to an annual wage base; for 2026, that cap is $184,500.4Social Security Administration. Contribution and Benefit Base Earnings above the cap are only hit with the 2.9% Medicare portion, and there is no ceiling on Medicare tax.
High earners owe an additional 0.9% Medicare surtax on self-employment income above $200,000 for single filers or $250,000 for married couples filing jointly, pushing the effective Medicare rate to 3.8% on income over those thresholds.5Internal Revenue Service. Topic No. 560, Additional Medicare Tax
One partial offset: you can deduct half of your self-employment tax when calculating adjusted gross income on Form 1040. That reduces your income tax, though not the self-employment tax itself. Schedule SE handles the calculation and rides along with your personal return.6Internal Revenue Service. About Schedule SE (Form 1040), Self-Employment Tax
Paying as You Go: Quarterly Estimated Taxes
No one withholds tax from your business income, so you pay throughout the year. The IRS requires estimated quarterly payments if you expect to owe $1,000 or more in total tax after any withholding and credits.7Internal Revenue Service. Estimated Tax Each payment covers both income tax and self-employment tax together.
The 2026 due dates are:
- April 15, for income earned January through March
- June 15, for income earned April through May
- September 15, for income earned June through August
- January 15, 2027, for income earned September through December
Missing a deadline or underpaying triggers a penalty. You can avoid it by meeting a safe harbor: pay at least 90% of the current year’s tax, or 100% of the prior year’s tax liability. If your adjusted gross income exceeded $150,000 in the prior year ($75,000 if married filing separately), the second safe harbor rises to 110% of the prior year’s tax.8Internal Revenue Service. Underpayment of Estimated Tax by Individuals Penalty That 110% rule catches a lot of growing businesses off guard in a strong second year.
No Texas Income Tax, No Franchise Tax
Texas does not tax personal income, so your Schedule C profit is never taxed a second time at the state level. Texas does levy a franchise tax on most business entities operating in the state, but Texas Tax Code Section 171.0002 specifically excludes sole proprietorships from the definition of “taxable entity.”9State of Texas. Texas Tax Code TAX 171.0002 – Definition of Taxable Entity You file no franchise tax return and owe nothing under that tax so long as you remain a sole proprietor.
That exemption disappears the moment you convert to an LLC or corporation. For 2026, taxable entities with annualized revenue below $2,650,000 owe no franchise tax but may still need to file a report.10Texas Comptroller of Public Accounts. Franchise Tax Rates, Thresholds and Deduction Limits Worth knowing before you change structures.
Texas Sales and Use Tax
Texas raises much of its revenue through sales tax, and sole proprietors who sell taxable goods or certain services collect it from customers and remit it to the state. The state rate is 6.25%, and local jurisdictions can add up to 2%, for a maximum combined rate of 8.25%.11Texas Comptroller of Public Accounts. Sales and Use Tax
Sales tax applies to most tangible goods you sell, lease, or rent. Services are taxable only if they fall within the 17 categories listed in Texas Tax Code Section 151.0101, which include real property repair and remodeling, data processing, security services, debt collection, telecommunications, and credit reporting.12State of Texas. Texas Tax Code TAX 151.0101 – Taxable Services Most professional services, such as legal advice, medical care, and accounting, are not on the list and are not subject to sales tax.
Before making any taxable sale, you need a sales tax permit from the Texas Comptroller. The permit is free, and operating without one when required is a violation.13Texas Comptroller of Public Accounts. Texas Online Tax Registration Application You then file returns monthly, quarterly, or annually based on your sales volume.
Use Tax on Out-of-State Purchases
If you buy equipment, supplies, or inventory from an out-of-state vendor who does not charge Texas sales tax, you owe use tax at the same combined rate that would have applied locally. Permit holders report these purchases on their regular sales tax return; businesses without a permit file Form 01-156 separately with the Comptroller.14Texas Comptroller of Public Accounts. Texas Sales and Use Tax Frequently Asked Questions – Section: Use Tax A credit applies for any sales tax already paid to another state on the same purchase.
Business Personal Property Tax
Local governments in Texas tax the tangible assets you use in your business: equipment, furniture, fixtures, computers, tools, and inventory. Your county appraisal district administers this tax, and many sole proprietors do not learn about it until the first bill arrives.
If you own or manage business personal property with a market value above $125,000, you must file an annual rendition listing all eligible assets by April 15. An automatic extension to May 15 is available if requested in writing before the original deadline. Even below the $125,000 threshold, you may still need to file a statement certifying that the value falls below it.
Skipping the rendition is expensive. The penalty for failing to file on time is 10% of the total taxes due on the property for that year. Filing a fraudulent rendition can trigger a penalty of 50% of the taxes due. These penalties stack on top of the property tax itself, and appraisal districts enforce them.
Employment Taxes if You Hire
Hiring your first employee adds a layer of federal and state obligations. You withhold federal income tax from each employee’s wages based on their W-4, plus the employee’s 6.2% Social Security and 1.45% Medicare shares, and pay matching amounts from business funds. FICA deposits follow an IRS schedule, typically monthly or semi-weekly. You will need an Employer Identification Number to run payroll and file employment tax returns.15Internal Revenue Service. Get an Employer Identification Number
Texas has no state income tax to withhold, but employers pay state unemployment insurance tax. Once you pay wages, you register with the Texas Workforce Commission.16Texas Workforce Commission. New Texas Employer Information The tax applies to the first $9,000 of wages paid to each employee per calendar year, at a rate the TWC assigns based on your industry and claims history. Rates for 2026 top out at 6.32%.17Texas Workforce Commission. Unemployment Insurance Tax Rates The tax is paid quarterly and is entirely the employer’s obligation; nothing is withheld from employee pay.