Washington Business Tax – Complete guide
When you start a small business in any state in the USA including Washington, you will need to be compliant with federal, state, and local tax requirements. The type of taxes may vary depending on the type of business entity although there is a common Washington business tax for all entities. We have created this article to provide information and guidance on the various taxes applicable in this state, the Washington business tax rate, and how different businesses are taxed.
Washington Business Tax
Every type of business is required to file tax returns at the federal level and also in the state that it is based in. Some businesses like foreign entities have to file taxes in their formation state (home state) as well as any other state where they are conducting their business. If you start a business in Washington then you will not be required to file any income tax but your company may be required to file a small business tax in Washington. It is important to note that each state including Washington has its own set of tax requirements. The Washington business tax rate and filing processes would be different from other states.
What taxes do businesses pay in Washington?
Washington is a popular state amongst entrepreneurs as it is ranked 11th in the list of states with the best business tax climate. The state does not have any personal or corporate income tax. You can form different types of domestic and foreign entities in Washington including a sole proprietorship, a limited-liability Company, a C corporation, and even an S Corporation. Each type of entity will have a different tax status in the state and will be required to file some sort of Washington business tax. Your company may be required to file a single form of business tax or multiple taxes, which will require you to use a Washington business tax calculator for determining the rate or amount of taxes. Let’s try to understand the different types of taxes applicable to small businesses in the state of Washington.
Business and Occupation tax
A primary Washington business tax is known as the Business and Occupation tax (B&O tax). The B&O tax is a type of gross receipts tax. It is calculated based on the value of products, gross income of the company, or gross proceeds from sales. This tax rate varies depending on tax classifications for common business activities like accounting, actuarial, amusement services, and advertising among others. If your company conducts multiple activities then you will be required to report under multiple tax classifications. You will need a Washington business tax calculator to determine the total B&O tax under such circumstances.
The Washington business tax rate for Business and Occupation tax will also vary depending on classification categories as under:
- Retailing B&O tax
- Wholesaling B&O tax
- Manufacturing B&O tax
- Service and other activities B&O tax
Example: If you have a company that provides computer services then it will be classified under retailing B&O tax or wholesaling B&O tax. If you provide data processing services then the classification category will be Service & Other Activities B&O.
Washington Retail sales tax
One of the types of small business tax in Washington is the retail sales taxes and it is an important source of revenue for the state government. Normally, if your company is providing retail services or selling retail products to a customer then you will be required to collect retail sales tax. Retail sales in the state are also defined as the sale of any tangible personal property. A business will also be required to pay retail sales tax on the purchase of any items that are meant for business use like equipment and supplies. The retail Washington business tax rate is currently 6.5 percent and is governed by chapter 82.08 RCW.
Washington Use Tax
Use tax is a type of small business tax in Washington, which is levied on the use of specific products and certain services in the state, especially where sales tax is not applicable or not paid. Goods that are used in this state will be subject to either use tax or sales tax but both taxes cannot be levied simultaneously. The use tax may be applicable in the following scenario:
- If a company purchases goods in another state that does not have any sales tax or its sales tax rate is lower than that of Washington
- If goods have been purchased from a company or individual who cannot collect sales tax
- The Washington business tax rate for use tax will be levied on goods that have been purchased out of state through the Internet, by subscription, or using a mail order catalog.
It is important to note that the use tax rate is divided into two parts, one being the retail sales tax and the other being the local tax. The rate may vary according to the city, county, or local jurisdiction.
Are you thinking of forming a new company in Washington?
How are Washington Businesses Taxed?
If you are planning to form a startup in Washington, then one of the important annual requirements will be filing business taxes. The state does not have any corporate or personal income tax but there are several other types of small business taxes in Washington. The taxes and the business tax rate may vary depending on the type of business structure as well as the location of the company. You may need to file more than one type of business tax and therefore, it is important to use a Washington business tax calculator to determine the taxes. Let us look at the different types of entities and their tax obligations in this state.
Taxes for an LLC
If you are thinking of starting an LLC in Washington, then for taxation purposes, it will be considered a pass-through entity. This means that your LLC will not be required to file federal or Washington business tax. Instead, the income will pass through to you, the owners, and other members. Normally, in such a situation, members have to file personal income taxes, but the state doesn’t have any. Consequently, other forms of business taxes will be applicable for a limited liability company in Washington.
The most common Washington LLC tax is the business and occupation (B&O) tax. The tax rate will vary according to the tax classification, which is the type of business activity your limited liability company specializes in. Apart from this, you may also be required to file retail sales tax or use tax, other industry-specific taxes, and even personal property tax. An LLC in Washington may require its members to file self-employment tax if they are taking profits from the said limited-liability company.
Taxes for a C Corporation
If you are planning to form a Washington C corporation then the good news is that there are no corporate taxes in this state. Alternatively, your company will be subjected to business and occupation (B&O) tax. The other types of Washington Corporation taxes applicable include:
- Retail sales tax – Applicable on sales of any tangible personal property to consumers like office & stationery supplies, prepaid wireless cards, T-shirts, etc
- Use tax – It is applicable on goods purchased outside Washington and sold in the state like showroom and office supplies, equipment, mechanical and electrical parts, accessories, etc.
- Other industry-specific taxes – This is a type of excise tax administered by the Department of Revenue in specific industries or business activities like aircraft, spirits sales, and petroleum products, among others.
- Personal property tax – This small business tax in Washington will be applicable if the personal property owned by individuals is used for business including land, structures, and equipment.
Taxes for S Corporation
If you choose S Corporation tax treatment then one of the Washington benefits is that you will be exempt from self-employment taxes. An S corporation will be required to file the business and occupation (B&O) tax. Washington Corporation tax applicable for an S Corporation would include retail sales tax, use tax, excise taxes, and other industry-specific taxes.
Taxes for a Sole Proprietorship
If you form a sole proprietorship in Washington then you will need to report your profits by filing the income as individual tax returns. These taxes have to be filed with the IRS every quarter and you will need to use Form 1040-ES (estimated tax form). Apart from this, you may be required to file other small business taxes in Washington like retail sales and use tax depending on the business activity and jurisdiction of your business.
Taxes for Partnerships
If you form a partnership company in Washington then the applicable taxes would be similar to the Washington LLC tax or taxes for sole proprietorships. Partners will be required to file individual tax returns based on the income they have earned through the business. If you use a personal property for business then you will have to file personal property tax. You may also need to file sales and use tax depending on your business activity.
Ready to Incorporate Your Company in Washington?
You can choose to form a variety of entities in Washington from a Sole Proprietorship, to a C Corporation, an LLC, and S Corporation. The process for a new business formation and the annual requirements including taxes would be different, exhaustive, and time-consuming. This is where IncParadise can provide meaningful assistance. We are one of the top incorporation service providers in the state. We can help to register your LLC or corporation in Washington.
Once you have formed a new business, the state of Washington would need you to be compliant with the annual requirements. Hence, IncParadise offers additional services to fulfill such requirements such as foreign qualification, annual report, and filing DBA among others.