Austin, Texas Startup Tax Benefits: No Income Tax, Franchise Tax, and More

Texas does not impose a personal income tax or a corporate income tax. Article VIII, Section 24-a of the Texas Constitution, added by voters in 2019, prohibits a state tax on the net incomes of individuals, so changing that would take another constitutional amendment. Businesses pay the franchise tax instead, which is measured on margin rather than net income.

For founders, no state income tax means salary, bonuses, option exercises, RSU vesting and gains on selling startup stock carry no Texas tax. The comparison is sharpest against California, where the same income is taxed at graduated rates up to 13.3% (including the 1% Behavioral Health Services Tax, formerly the Mental Health Services Tax, above $1 million), and California does not follow the federal QSBS exclusion.

For C corporations, there is no tax on corporate profits at the state level. The franchise tax (below) can still apply once revenue passes the no-tax-due threshold, and it applies whether or not the company is profitable.

That combination is a large part of why Austin has become a major startup and venture market. The benefit is real but narrower than it looks: it covers Texas tax only, and income earned while working in another state can still be taxed there.

Texas imposes a franchise tax (often called the margin tax) on most entities doing business in the state, including corporations and LLCs. Taxable margin is the lowest of four calculations: total revenue times 70%, total revenue minus cost of goods sold, total revenue minus compensation, or total revenue minus $1 million.

The rate is 0.75% of taxable margin, or 0.375% for businesses primarily engaged in retail or wholesale trade. Entities with total revenue of $20 million or less can use the EZ computation at 0.331% of apportioned revenue, with no deductions.

For reports due in 2026 and 2027, entities with total revenue of $2,650,000 or less owe no franchise tax (the threshold was $2,470,000 for 2024 and 2025). Texas eliminated the No Tax Due Report for reports due in 2024 and later, but an entity at or under the threshold still files a Public Information Report (Form 05-102) or Ownership Information Report (Form 05-167).

For example, a software company with $5 million of revenue and $4 million of compensation computes margin as the lowest of $3.5 million (70%), $5 million minus COGS, $1 million (revenue minus compensation), or $4 million (revenue minus $1 million). Taxable margin is $1 million, and the tax is $7,500 before apportionment. The compensation deduction is capped per person ($480,000 for 2026 and 2027 reports), which matters for companies with highly paid founders.

Reports are due May 15. You can request an extension on Form 05-164, and late reports carry a $50 penalty plus 5% or 10% late-payment penalties.

Texas imposes a state sales tax of 6.25%, with local taxes bringing the combined rate to as high as 8.25% in most major cities, including Austin. The economic nexus threshold for sales tax is $500,000 in Texas revenue during the prior 12-month period, one of the highest thresholds in the nation.

For technology companies, Texas taxes data processing services at 80% of the sale price. This means that SaaS subscriptions, cloud hosting, and data analytics services sold to Texas customers are taxable, but the taxable amount is only 80% of the invoice. The effective tax rate for data processing services in Austin is approximately 6.6% (8.25% times 80%).

Charges to write a program from scratch for a single customer that receives exclusive rights to it are generally not taxable under Comptroller Rule 3.308. Prewritten (canned) software is taxable whether it is delivered on media or electronically, and so is a customized program the seller also licenses to others.

The Comptroller's guidance on taxable services names sellers of software as a service and application service providers as data processing providers. Some products are instead information services, such as subscription access to a financial or market database, which carry the same 20% exemption. Using a computer as a tool to deliver a professional service, such as accounting or design work, is not data processing. Where a product sits on that line is fact-specific, so document the classification you use.

For ecommerce companies selling physical products, Texas's $500,000 economic nexus threshold means that smaller sellers can operate for a longer period before triggering Texas sales tax collection obligations, compared to the $100,000 threshold in most states.

Texas and Austin incentives are mostly aimed at job creation and capital investment, not at seed-stage software companies. The Texas Enterprise Zone Program refunds state sales and use tax for qualifying projects that create or retain jobs, and the Governor's University Research Initiative funds research hires at Texas universities. Both are application-based and usually relevant to companies with physical facilities and significant headcount.

Austin has no city income or payroll tax. Property taxes are the main local business tax, including business personal property tax on equipment, so check with the Travis Central Appraisal District whether you need to file a rendition for office equipment and computers.

The practical advantages for Austin startups are less about incentives and more about the ecosystem: the University of Texas at Austin talent pool and technology transfer office, accelerators such as Capital Factory, and a growing local investor base. For tax purposes, the federal R&D credit and QSBS do much more for a typical startup than any Texas program.

While Texas offers significant state-level tax advantages, Austin startups must not overlook federal tax obligations and multi-state considerations. Federal corporate income tax (21% for C-Corps) applies regardless of state, and federal payroll taxes, estimated tax payments, and information returns are required just as they would be for a company in any state.

Multi-state exposure is increasingly common for Austin startups. If you have remote employees in California, you create income tax nexus in California for your California-source income. California uses market-based sourcing, so revenue from California customers would be taxable in California regardless of your Texas headquarters. Understanding which states can tax your income, and how apportionment works across states, is essential for companies with distributed teams.

For founders moving from a high-tax state to Texas, the old state may still tax part of your equity income. California, for example, taxes nonresidents on the share of option and RSU income attributable to work performed in California, even after the move. The California Franchise Tax Board regularly audits residency for people who sell stock soon after relocating. A clean break from California requires careful planning, including establishing Texas domicile, changing voter registration, obtaining a Texas driver's license, and moving primary banking and social connections.

At SpryTax, we help Austin startups use the Texas advantages and handle the multi-state filings that come with a distributed team. Our services include Texas franchise tax filing, federal tax compliance, multi-state income tax planning, 409A valuations, and CFO services tailored to SaaS and technology companies. This article is general information checked in October 2026, not tax advice for your specific facts.