Tax Compliance Guide for a Texas-Based S Corp

Federal S Corporation Filings: As a pass-through entity, an S corporation isn't subject to federal corporate income tax. However, it must file an annual federal tax return (Form 1120-S) by March 15 for calendar-year corps. This informational return reports income and deductions, and the S corp issues a Schedule K-1 to each shareholder, who reports their share of income on personal returns. Failure to file on time can result in penalties of $220 per month per shareholder.

Texas Franchise Tax: Texas levies a franchise tax (a gross receipts/margin tax). S corps must file an Annual Franchise Tax Report by May 15. The tax is based on the company’s “taxable margin.” For 2024 and 2025, entities with annual revenue of $2.47 million or less owe no franchise tax, but must still file a Public Information Report annually.

Washington B&O Tax: Washington imposes a Business & Occupation (B&O) tax, which is a gross receipts tax. If the S corp has employees in Washington, it must register and pay B&O tax on its Washington-sourced revenue. The rate for most service and tech companies is 1.5%. A small business B&O tax credit can eliminate liability for smaller businesses, but filing is still required.

Sales Tax Nexus: Serving customers across the U.S. can create tax "nexus." After the Wayfair decision, states enforce economic nexus rules. Commonly, making over $100,000 in sales or 200 transactions in a state triggers an obligation to collect and remit that state’s sales tax. The startup must monitor its sales volume in each state.

Income/Franchise Tax Nexus: Physical presence (an employee or office) almost always creates income tax nexus. Several states are also adopting economic nexus for income taxes, where significant revenue from a state (e.g., >$500,000) can trigger filing requirements, even without a physical presence.

Restricted Stock and 83(b) Elections: When granting restricted stock, employees can file an 83(b) election with the IRS within 30 days to be taxed on the stock's value at grant time rather than at vesting. The company should inform and assist employees with this process, using the new Form 15620.

Stock Options and 409A Valuations: To grant stock options, startups must comply with IRC Section 409A, which requires the exercise price to be at or above the Fair Market Value (FMV) on the grant date. To establish a defensible FMV, companies must obtain a 409A valuation from an independent appraiser at least annually.

ISO vs. NSO Reporting:

• Incentive Stock Options (ISOs): When an ISO is exercised, the company must provide the employee and the IRS with Form 3921 by January 31 of the following year.
• Nonqualified Stock Options (NSOs): When an NSO is exercised, the "spread" (value minus exercise price) is treated as wage income. The company must withhold payroll taxes and report it on the employee’s W-2.

State Annual Reports: In Texas, the annual Franchise Tax Report serves as the annual report. In Washington, a separate Annual Report must be filed with the Secretary of State by the end of the anniversary month of registration.

Payroll Tax Filings: The company must handle federal and state payroll compliance. This includes quarterly Form 941 filings, annual W-2s for employees, and 1099-NECs for contractors. State-level compliance includes unemployment insurance taxes in both Texas and Washington, plus Washington's Paid Family and Medical Leave (PFML) program.

Registered Agent Maintenance: The company must maintain a registered agent in Texas and any state where it is registered as a foreign entity (like Washington).