California vs. Texas: Which State Has the Better Tax System for Businesses? (2025 Edition)

Texas

Introduction

California and Texas are two of the largest economies in the U.S., but their tax systems couldn’t be more different. If you’re starting or relocating a business in 2025, understanding how each state handles taxation is critical to your bottom line.

Key Tax Categories Compared

Tax CategoryCaliforniaTexas
Corporate Tax8.84%None
Franchise TaxYes ($800 min for LLCs)Yes (Margin Tax)
Personal Income TaxUp to 13.3%None
Sales Tax (State)7.25% base6.25% base
Property Tax Rate (Avg)0.76%1.60%
Payroll/Employment TaxYesYes

Business Income Tax: CA vs. TX

Applicable Code: IRC §7701; California Revenue & Taxation Code §23151

  • California:
    • 8.84% corporate tax on C Corporations (Form 100)
    • 1.5% tax for S Corporations (Form 100S)
    • LLCs pay an $800 minimum plus gross receipts fee (Form 568)
  • Texas:
    • No corporate income tax
    • Businesses instead pay a Margin Tax (see next section)

Franchise Tax: LLCs and Corporations

StateFranchise Tax Structure
California$800 minimum + gross receipts (LLCs) or % of net income (corps)
TexasMargin Tax: 0.375% to 0.75% on gross revenue over $2.47M (2024 threshold)

Example:

  • A Texas LLC with $5M in revenue may owe ~$18,750 in franchise tax
  • A California LLC with similar revenue owes $800 franchise tax + $6,000 gross receipts fee

Sales Tax Structure and Rates

  • California:
    • State base rate: 7.25%
    • Combined local rates: up to 10.75%
    • Administered by CDTFA
  • Texas:
    • State rate: 6.25%
    • Local add-ons: up to 8.25%
    • Administered by Texas Comptroller

Both states require registration and periodic filing of sales and use tax returns.

Payroll & Employment Taxes

TaxCaliforniaTexas
Unemployment Tax1.5%–6.2% (on $7,000 wages)0.31%–6.31% (on $9,000 wages)
State DisabilityYes (1.1%)No
State Income WithholdingYesNo

In California, employers must register with EDD; in Texas, with the Texas Workforce Commission.

Real Estate and Property Tax Impact

  • California:
    • Property tax is 1% of assessed value under Prop 13
    • Assessed value increases capped at 2% annually
  • Texas:
    • Higher property tax rate: average 1.6%
    • No limits like Prop 13
    • Property owners may face frequent reassessments

Example:
A business property worth $1M:

  • CA tax ≈ $10,000/year
  • TX tax ≈ $16,000/year

Entity Registration and Ongoing Costs

StateInitial & Annual Fees
California$70–$100 formation + $800/year + Statement of Info
Texas$300 formation + no annual franchise fee if under $2.47M gross revenue

California’s $800 minimum tax applies even if no income is earned, making it costlier for startups and holding companies.

Step-by-Step Guide for Business Owners Considering a Move

Step 1: Determine your business structure and expected revenue

Step 2: Calculate tax obligations under both state laws

Step 3: Consider payroll and property tax impact

Step 4: Evaluate entity maintenance and filing requirements

Step 5: Consider market, talent, and operational needs

Step 6: Consult a CPA for legal structuring and transition planning

Conclusion

Texas offers significant tax savings for many business types, especially startups and high-margin service providers. However, California may still make sense for companies that require access to venture capital, a skilled workforce, or the state’s massive consumer market. The best choice depends on your business model, growth plans, and risk tolerance.

Call to Action

Considering a move to Texas or staying in California? Let’s do the math together.
Schedule a consultation with Anshul Goyal, CPA EA FCA, a U.S.-licensed CPA and IRS Enrolled Agent who advises business owners on multistate tax strategies and corporate structuring.
📅 Book your appointment here

FAQs – CA vs. TX Business Tax Comparison

Q1: Is Texas really tax-free for businesses?
Not entirely. Texas doesn’t have income tax but charges a Margin Tax on gross revenue.

Q2: Can I avoid California’s $800 tax by registering in Texas?
Only if you stop doing business in California. If you have nexus in CA, you still owe.

Q3: Is it easier to form an LLC in Texas?
Yes. Texas has fewer annual maintenance costs and no minimum tax for low-revenue entities.

Q4: Are payroll taxes higher in California?
Yes. California adds state disability insurance (SDI) and income tax withholding.

Q5: Can I have companies in both states?
Yes—but you must register as a foreign entity in both states and pay dual compliance fees.

About Our CPA

Anshul Goyal, CPA EA FCA is a Certified Public Accountant in the U.S., Enrolled Agent before the IRS, and Fellow Chartered Accountant. With 15+ years of experience, Anshul advises startups, high-income founders, and business owners on multistate taxation, entity strategy, and tax efficiency, saving clients over $200M.

Disclaimer

This blog is intended for informational purposes only and should not be considered legal or tax advice. State tax laws change frequently. Always consult with a licensed CPA before making decisions about business registration, relocation, or compliance.

 

 

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