Texas margin tax: beyond the EZ
Once revenue passes the no-tax-due threshold ($2.65 million for 2026–2027 reports), Texas taxes your “margin”, and lets you choose the computation that produces the smallest one. Picking well can cut the bill in half.
Step 1: total revenue
Start from the revenue lines of your federal return, then subtract items Texas excludes: mainly flow-through funds you are required to pass on to others (such as certain amounts collected for subcontractors in construction, or pass-through legal settlements), bad debts, and some dividends and interest. The result is “total revenue.”
Step 2: pick the lowest margin
- 70% of total revenue: the default when no deduction beats it.
- Total revenue minus cost of goods sold. Texas COGS follows its own rules, not the federal ones: it covers production, acquisition, and handling of goods (including labor directly involved), but generally not services, selling, or distribution costs. Manufacturers, e-commerce sellers, and construction contractors usually win here.
- Total revenue minus compensation — W-2 wages and cash compensation up to a per-person cap that the Comptroller indexes every two years, plus benefits such as health insurance and retirement contributions. 1099 contractor payments don't count. Services firms with large payrolls usually win here.
- Total revenue minus $1 million: helps businesses just above the threshold with few deductible costs.
You can switch methods each year by choosing a different election on the report.
Step 3: apportion and apply the rate
Multiply the margin by your Texas apportionment factor — Texas gross receipts divided by gross receipts everywhere. Receipts from services are sourced to where the service is performed; goods are sourced to where they're delivered. Then apply the rate: 0.75%, or 0.375% for businesses primarily engaged in retail or wholesale trade.
The EZ Computation shortcut
Businesses with total revenue of $20 million or less can skip margin entirely and pay 0.331% of apportioned revenue on Form 05-169. There are no deductions and no credits, and it's simple, but it's not always cheapest. EZ is equivalent to taxing 44% of revenue at 0.75%, so a business whose best margin is below 44% of revenue pays less on the long form.
| $6M revenue, 100% Texas, services firm | Margin | Tax |
| 70% of revenue | $4,200,000 | $31,500 |
| Minus COGS ($500k) | $5,500,000 | — |
| Minus compensation ($3.6M) | $2,400,000 | $18,000 ✓ |
| Minus $1M | $5,000,000 | — |
| EZ: 0.331% of revenue | — | $19,860 |
Illustrative. Compensation assumed within the per-person cap. The long form saves $1,860 over EZ here; a firm with $2M of compensation would find EZ cheaper.
Other details worth knowing
- Combined groups: commonly owned businesses in a unitary relationship file one combined report.
- A computed tax under $1,000 isn't owed.
- Reports are due May 15 with extensions available; the PIR still goes in alongside.
Estimate the EZ path in our Texas explorer and compare California vs Texas for the bigger picture.