Many Hispanic entrepreneurs discover business taxes in the USA too late: with a letter from the state, a fine, or an accountant telling them they had to declare something no one mentioned. The confusion is almost always the same: three completely different taxes—income tax, sales tax, and franchise tax—are mixed up, and these are paid to different entities, on different dates, and for different reasons. In this guide, I explain them one by one, with real-world examples for each state, so you know which ones apply to you and can stop operating blindly.
The three taxes that get confused all the time
Before going into detail, keep this idea in mind, as it's what organizes everything else:
- Income tax — you pay on your earningsIf you didn't win, you generally don't pay.
- sales tax - it You charge the customer And you hand it over to the state. It was never your money.
- Franchise tax — you pay for have the company registered In that state, it can happen to you even if you've lost money.
That last one is the one that catches everyone by surprise, because it goes against intuition: you had no sales and yet the state still charges you.
Income tax: the tax on what you earn
It is the best known and has two layers: the federal and the state.
At the federal level, most single-owner LLCs don't pay taxes as a business; they're pass-through . The profit is passed on to your personal tax return and reported on Schedule C of your Form 1040. On that net profit, you pay two things: income tax according to your income bracket and a 15.3% self-employment tax (12.4% for Social Security and 2.9% for Medicare), which covers what an employer would normally contribute on your behalf. That 15.3% is what throws off the budget for someone coming from a salaried job.
In addition, the IRS expects you to pay in advance each quarter with your estimated taxes . If you wait until April of the following year, you'll be charged a penalty for late payment in addition to the tax due. You can find the dates and details in our guide on how to pay your business taxes and on the IRS website in Spanish.
At the state level, things change depending on where you are: there are states without a personal income tax (Texas, Florida, Tennessee, Washington, Nevada) and states where it exists and has a significant impact. If your earnings are already high, it's worth considering whether changing your business structure is beneficial; we compare the numbers in our LLC vs. S-Corp article.
Sales tax: the tax you collect, not the tax you pay
In the United States, there is no federal sales tax. It is levied by the states, and then by counties and cities. That's why you can see different rates within the same city depending on the exact address.
Three rules you should be clear about:
- It's not your money. You collect the sales tax from the customer and save it to pay to the government. Spending the collected sales tax is the mistake that sinks the most small businesses.
- You need permission before you can collect it. It's called a sales tax permit or seller permit, and you get it from your state's revenue department. Collecting taxes without a permit is illegal.
- Not everything is subject to sales tax. It depends on the state and the industry: many services are exempt, and unprepared food often receives special treatment. A cleaning service accountant and a restaurant owner face very different realities.
If you sell online, the concept of nexus comes into play : when you exceed a certain sales volume in another state, that state can require you to collect and remit its sales tax even if you have never set foot there.
Franchise tax: the tax for existing
Here's the surprise. The franchise tax has nothing to do with franchises: it's what some states charge for the privilege of having your business registered and operating there. It's calculated on gross income, capital, or net worth—not on profit—and that's why you might be charged it in a year with losses.
Not all states have it, and where it does, the name and format vary considerably. The important thing: find out if your state charges it before registering , not after.
Business taxes in the USA: five states, five realities
These figures are from 2026 and come from each state's revenue department. Always verify them with the official source before making a decision, as they change from year to year.
- Texas. No personal income tax, but franchise tax applies. For 2026 reports, the "no tax due" threshold is $2.65 million of total annualized income: below that, you don't pay tax, but You still have to submit the Public Information Report. Many believe they owe nothing and don't file anything: that's when the fine arrives. More details in How to start a business in Texas.
- California. The toughest case: every LLC that operates or is organized in California pays $800 per year of minimum franchise tax, even if it does not invoice a dollar, and continues to owe it until it formally cancels the LLC.
- Tennessee No income tax on wages, but with two state taxes on businesses: a 6.5% excise tax on taxable income in Tennessee and a 0.25% franchise tax on the greater of net worth and tangible property in the state, with a minimum of $100. See How to start a business in Tennessee.
- Washington. No personal income tax, but with the B&O tax, which taxes gross income Without deducting expenses: 0.471% in retail and 1.5% in services for those with revenue under $1 million. You can owe B&O in a year in which you lost money.
- Florida. No personal income tax and no franchise tax for LLCs. That's why it appears so often on lists of favorable states.
The mistakes that cost the most
After years of seeing cases, these four mistakes keep coming up: spending the sales tax collected ; not filing the state tax return, believing that if you don't owe taxes, you don't have to file; not separating business and personal accounts, which makes it impossible to substantiate expenses in an audit; and registering the LLC in another state based on internet advice, ending up with obligations in two states instead of one. If you're just starting to register, first review how to open an LLC step by step.
Conclusion
The three taxes answer three different questions: income tax asks how much you earned, sales tax asks how much you overcharged the customer, and franchise tax simply asks if your business exists in that state. Understanding this difference is what separates the business owner who sleeps soundly from the one who opens the state's letters with trepidation. Take an hour this week, review which of the three apply to you based on your state and your industry, and put them on your calendar. It's the best hour you'll spend this year.
And if you'd rather not guess: at Jimenez Consulting Tax Services we work with Hispanic business owners to organize their accounting, calculate their quarterly payments, and comply with the state without surprises or fines.
