Texas Contractor Taxes and Licensing: Labor, Materials, Franchise Tax and Licenses

In Texas, the building type decides whether labor is taxed. Labor to repair, remodel or restore residential real property isn't taxable, and neither is new construction labor. Repairing or remodeling nonresidential property is taxable on the total charge, labor included. Materials follow the contract: lump-sum contractors pay tax on purchases; separated contracts charge tax on materials.

What makes Texas different for contractors?

Texas is the rare state where the same remodel is taxed differently depending on who lives or works in the building. Redo a kitchen in a house and the labor is tax-free. Redo the break room in an office and the Comptroller taxes the full invoice. Texas also lets most private employers skip workers' comp entirely, and it has no state license for general building contractors. Those three facts shape how Texas shops bid, bill and insure.

What follows summarizes the Texas Comptroller, TDLR and TDI sources as of 2026-10-19. It's general information, not tax advice. Your contracts and customers are specific, so run them past a CPA who knows Texas sales tax.

Is labor taxable in Texas?

It depends on the property and the type of work. Comptroller Publication 94-116 says "the construction labor is not taxable" for new construction, and labor to repair, remodel or restore residential real property "is not taxable." For nonresidential property, "the total amount charged for remodeling, repairing, or restoring nonresidential real property is taxable." Residential means family dwellings such as houses, apartments, condos, nursing homes and retirement homes; hotels and short-term rentals are treated differently.

Publication 96-259 lists "landscaping and lawn maintenance (including tree surgery and plant leasing)" and "pest control and extermination, garbage and other waste collection or removal, janitorial and custodial services" as taxable real property services. If you mow, spray or clean, you're likely collecting tax even though a roofer isn't. Whether a residential exception applies to your yard work is something to check with the Comptroller.

Who pays tax on materials: lump-sum vs. separated contracts

On residential and new construction work, the contract format decides who pays. "Under a lump-sum contract, you pay tax on all your supplies, materials, equipment, and taxable services when you buy them," the Comptroller says, and you don't charge the customer tax. Under a separated contract, where materials are stated separately from labor, you give your supplier a resale certificate for the materials that go into the job and collect state and local tax from the customer on the materials. Labor stays untaxed.

Tools, trucks and consumables you use up yourself are taxable to you either way. If an out-of-state vendor didn't charge Texas tax, you may owe use tax; see use tax for contractors. For the multi-state picture, read sales tax on labor vs. materials.

What is the Texas sales tax rate?

"Texas imposes a 6.25 percent state sales and use tax on all retail sales, leases and rentals of most goods," and cities, counties, transit authorities and special districts "can also impose up to 2 percent sales and use tax for a maximum combined rate of 8.25 percent." Collect the local rate based on the Comptroller's sourcing rules, which are covered in its local sales tax guidance.

Which Texas contractor licenses do you need?

Texas licenses specific trades statewide and leaves general building to cities. TDLR says anyone who performs "non-exempt electrical work in the state of Texas" must be licensed and work through a licensed electrical contractor. Air conditioning and refrigeration contractors "must have a TDLR license." Plumbing is licensed by the Texas State Board of Plumbing Examiners. These licenses apply regardless of job size.

Local licensing: many Texas cities require contractors to register, show insurance and pull permits before work starts. Requirements differ city to city, so check with the building department where the job is. More on how licensing works across states in our contractor license guide.

Does Texas have income tax or franchise tax for contractors?

Texas has no personal income tax, and a 2019 constitutional amendment (HJR 38) was written to "prohibit the legislature from imposing a tax on the net incomes of individuals." Instead, many businesses owe the franchise tax, also called the margin tax.

• Who files: corporations and LLCs, including a single-member LLC taxed as a sole proprietor federally. A sole proprietorship "that is not legally organized in a manner that limits its liability is not a taxable entity."
• No tax due: for 2026 and 2027 reports, entities at or below $2,650,000 in revenue owe no tax but still file a Public Information Report or Ownership Report.
• Rates: 0.75% for most businesses, 0.375% for retail and wholesale. The EZ computation, for total revenue up to $20 million, is 0.331%.

Federal income and self-employment tax still apply to your profit, so set money aside for quarterly estimated taxes. Our quarterly estimated tax calculator gives a starting number to review with your CPA.

Do Texas contractors have to carry workers' comp?

Usually not. TDI's Division of Workers' Compensation says "private employers can choose to carry workers' compensation insurance coverage, but it is not required in most cases." Employers who opt out, called non-subscribers, must report to the state that they don't have coverage and report certain injuries. Public construction contracts and many general contractors require subs to carry coverage anyway, so check your contracts. Going without coverage also changes your legal exposure if a worker is hurt; read workers' compensation for contractors and talk to an insurance agent.

What local taxes apply in Texas?

• Local sales and use tax up to 2%, for a combined maximum of 8.25%.
• No local income tax, since there is no state personal income tax.
• City contractor registration and permit fees. These aren't taxes, but they belong in your bid.

Nearby state guides

Crossing the Red River? Oklahoma also has no state general contractor license but taxes labor differently. Louisiana taxes repairs to movable property, and Arkansas taxes some installation labor. Florida is the other no-income-tax state in our southern guides.