Texas S Corporations: State Compliance & Federal S‑Corp Rules

Operating an S corporation in Texas involves distinct state‑level benefits and compliance requirements alongside federal S‑corporation rules. Below is a structured explanation of what Texas owners should expect, with links to the Texas Secretary of State (SOS), the Texas Comptroller of Public Accounts, and the IRS where federal interaction affects state compliance:

• IRS S corporations overview: https://www.irs.gov/businesses/small-businesses-self-employed/s-corporations

• Instructions for Form 1120‑S: https://www.irs.gov/pub/irs-pdf/i1120s.pdf

Formation and registration in Texas

• Texas entity creation is a state law matter. You form a corporation (or LLC) with the Texas SOS; the “S” status itself is a federal tax election, not a separate Texas entity type. See the SOS guidance: Formation of Texas Entities FAQs: https://www.sos.state.tx.us/corp/formationfaqs.shtml

• Filing options and forms are available from the SOS; online filing is through SOSDirect. See Corporations Section Forms (permissive forms and online access for domestic formations, foreign registrations, amendments, terminations, etc.): https://www.sos.state.tx.us/corp/forms_boc.shtml

• Foreign/out‑of‑state entities must register if “transacting business” in Texas (definition is contextual). See SOS guidance for foreign entities (covers Texas BOC § 9.001 registration requirements and penalties for non‑registration): https://www.sos.state.tx.us/corp/foreign_outofstate.shtml

Federal S‑corporation election (interaction with Texas)

• To be treated as an S corporation, file federal Form 2553 with the IRS. Once accepted, the S election governs federal taxation (with some entity‑level taxes still possible). Texas formation creates the corporation or LLC; “S‑corp” is a federal tax status. IRS S corps: https://www.irs.gov/businesses/small-businesses-self-employed/s-corporations

• S corporations must file Form 1120‑S annually, generally due the 15th day of the third month after the tax year ends (for calendar‑year 2024, due March 17, 2025), and may be required to e‑file if filing 10+ returns. Instructions for Form 1120‑S: https://www.irs.gov/pub/irs-pdf/i1120s.pdf

Texas franchise tax: who is subject and nexus

• Texas imposes franchise tax on each taxable entity formed, organized, or doing business in Texas. A foreign (out‑of‑state) taxable entity has economic nexus (and must file franchise tax) if it has annual gross receipts of $500,000 or more from business in Texas, even without physical presence, for reports due on or after January 1, 2020. Texas Comptroller remote sellers (economic nexus): https://comptroller.texas.gov/taxes/sales/remote-sellers.php

• “Engaged in business” indicators for sales/use tax (often a proxy for broader Texas tax responsibilities) include having a location, employees, deliveries, leases, or soliciting sales in Texas. See Texas Comptroller’s “Engaged in Business”: https://comptroller.texas.gov/taxes/publications/94-108.php

• Remote sellers with $500,000+ Texas revenue must collect and remit use tax (and should expect franchise tax filing responsibilities as well). Remote sellers: https://comptroller.texas.gov/taxes/sales/remote-sellers.php

Franchise tax filing: benefits, thresholds, and methods

• Report categories and thresholds:

  • For reports due on or after Jan. 1, 2024, entities with annualized total revenue at or below $2.47 million are not required to file a “No Tax Due” report, but many still must file a Public Information Report (PIR) or Ownership Information Report (OIR). Texas franchise forms (2025): https://comptroller.texas.gov/taxes/franchise/forms/

  • Entities may use EZ Computation if annualized total revenue is at or below $20 million. Passive entities and some REITs have simplified reporting (passive entities generally need not file PIR/OIR; REITs typically must). EZ Computation details and forms: https://comptroller.texas.gov/taxes/franchise/forms/

• Filing mechanics:

  • The Comptroller provides downloadable forms (Long Form and EZ Computation) and PIR/OIR forms. Extension and payment options are listed on the same page. Franchise forms: https://comptroller.texas.gov/taxes/franchise/forms/

  • Due dates are typically in mid‑May. For historical context and accounting period rules, see legacy instructions (helpful for planning cycles/initial/final reports): https://comptroller.texas.gov/taxes/franchise/2008-forms.php

• Passive entity benefit:

  • Passive entities (Texas Tax Code § 171.0003) benefit from reduced reporting burdens. Beginning with reports due on or after Jan. 1, 2024, passive entities are generally not required to file PIR/OIR, simplifying administrative compliance. Forms page (PIR/OIR instructions noted on individual forms): https://comptroller.texas.gov/taxes/franchise/forms/

Sales and use tax: permitting and optional single local rate

• If your S corporation sells taxable goods/services into Texas, you may need a sales/use tax permit. Remote sellers exceeding the $500,000 safe harbor must register and begin collecting/remitting state and local use tax no later than the first day of the fourth month after exceeding the threshold. Remote sellers: https://comptroller.texas.gov/taxes/sales/remote-sellers.php

• Texas offers an optional single local use tax rate of 1.75% for remote sellers (not available to Texas‑based sellers or marketplace providers collecting for others). This simplifies local tax collection when selling into Texas from out‑of‑state. Election/revocation timing rules apply. Remote sellers & single local rate: https://comptroller.texas.gov/taxes/sales/remote-sellers.php

Secretary of State registration and penalties for noncompliance

• If your S corporation is formed outside Texas but “transacts business” in Texas, you must register with the SOS. Penalties for failing to register can include inability to sue in Texas courts, injunction, late fees, and civil penalties. Name availability and assumed/fictitious name rules apply. See SOS foreign entity guidance: https://www.sos.state.tx.us/corp/foreign_outofstate.shtml

Annual disclosure reports (PIR/OIR)

• Even when no franchise tax is due (or when “No Tax Due” is not required because of the 2024 threshold), many entities must still file the PIR or OIR annually. Ensure you meet PIR/OIR obligations based on your entity’s status (e.g., passive entities are exempt from PIR/OIR, but most others are not). Forms page (see PIR/OIR forms and instructions): https://comptroller.texas.gov/taxes/franchise/forms/

Employment and unemployment‑related considerations

• At the federal level, S corporations with employees file employment tax returns (e.g., Form 941 and Form 940). Employers may be affected by FUTA credit reduction rules if they pay state unemployment tax to a “credit reduction state” (increases FUTA via Schedule A of Form 940). IRS FUTA credit reduction page: https://www.irs.gov/instructions/i940#en_US_2024_publink100053923

• Texas‑specific unemployment tax registration and rate assignment are administered by state workforce/unemployment agencies (separate from the Comptroller). Confirm registration, rate changes, and compliance directly with the Texas Workforce Commission.

Practical benefits summary for Texas S‑corp owners

• State compliance simplification for remote sellers:

  • Electing the 1.75% single local use tax rate can simplify local tax collection when selling into Texas from out‑of‑state. Remote sellers: https://comptroller.texas.gov/taxes/sales/remote-sellers.php

• Administrative relief for smaller entities:

  • For reports due after Jan. 1, 2024, entities below the $2.47 million revenue threshold are not required to submit a No Tax Due report (though PIR/OIR may still be required). Franchise forms & guidance: https://comptroller.texas.gov/taxes/franchise/forms/

  • Passive entities enjoy reduced disclosure (no PIR/OIR) and simplified franchise tax reporting by selecting the appropriate option on the return. Franchise forms & guidance: https://comptroller.texas.gov/taxes/franchise/forms/

• Clear nexus and permit rules:

  • Texas provides a clear economic nexus threshold for remote sellers ($500,000), allowing earlier planning for permits and tax compliance. Remote sellers: https://comptroller.texas.gov/taxes/sales/remote-sellers.php

Common requirements and pitfalls to avoid

• Don’t assume your federal S election replaces state filings. You still need SOS registration (if foreign) and Comptroller filings (franchise tax and PIR/OIR). “S‑corp” is a federal tax status, not a Texas entity type:

  • SOS formation FAQs: https://www.sos.state.tx.us/corp/formationfaqs.shtml

  • SOS foreign entity registration: https://www.sos.state.tx.us/corp/foreign_outofstate.shtml

• Watch the annual franchise tax cycle and forms. Even if no franchise tax is due, many entities must file PIR/OIR annually (with exceptions for passive entities). Entities with revenue ≤ $20 million may use EZ Computation:

  • Franchise forms (PIR/OIR, EZ/Long forms): https://comptroller.texas.gov/taxes/franchise/forms/

• If selling into Texas, monitor the $500,000 remote seller threshold. Once exceeded, register for a permit and start collecting/remitting use tax (and consider the single local rate election for simplification):

  • Remote sellers: https://comptroller.texas.gov/taxes/sales/remote-sellers.php

• Foreign entities must register before transacting business; penalties for non‑registration can be significant (e.g., inability to sue, injunction, late fees):

  • SOS foreign entity guidance: https://www.sos.state.tx.us/corp/foreign_outofstate.shtml

Key references

• Federal S‑corporation guidance and filing rules:

  • IRS S corporations: https://www.irs.gov/businesses/small-businesses-self-employed/s-corporations

  • Instructions for Form 1120‑S: https://www.irs.gov/pub/irs-pdf/i1120s.pdf

• Texas formation/registration and penalties:

  • Formation FAQs: https://www.sos.state.tx.us/corp/formationfaqs.shtml

  • Foreign/out‑of‑state entities: https://www.sos.state.tx.us/corp/foreign_outofstate.shtml

  • Corporations Section Forms: https://www.sos.state.tx.us/corp/forms_boc.shtml

• Texas franchise tax thresholds, filing options (EZ/Long), PIR/OIR, passive entity treatment:

  • Forms & instructions page (2025): https://comptroller.texas.gov/taxes/franchise/forms/

• Texas remote seller rules; single local use tax rate; permit requirements:

  • Remote sellers: https://comptroller.texas.gov/taxes/sales/remote-sellers.php

• “Engaged in business” indicators for sales/use tax responsibilities:

  • Texas Comptroller guidance: https://comptroller.texas.gov/taxes/publications/94-108.php

• Annual report cycles and historical due‑date context:

  • Legacy (historic) instructions & cycles: https://comptroller.texas.gov/taxes/franchise/2008-forms.php

• Federal unemployment (FUTA) credit reduction context:

  • FUTA credit reduction (Schedule A, Form 940): https://www.irs.gov/instructions/i940#en_US_2024_publink100053923

This essay is not tax advice. Always consult a qualified tax professional for your specific situation.