Washington State LLC Taxes

Note: Our tax lesson is not as step-by-step as our other forming an LLC in Washington lesson, due to the uniqueness and variation among businesses. Taxes are not as straightforward as forming an LLC in Washington (things vary by city and vary by industry), and therefore, the information below is an overview, and not a comprehensive guide. Thank you for your understanding.

Recommendation:
We recommend speaking with a few accountants in Washington to make sure you meet all your federal, state, and local tax obligations. For tips on finding an accountant for your LLC, please see our How to Find an Accountant guide.

Taxes are paid on 3 levels:

• Federal
• State
• Local

Federal Taxes for your LLC

Federal taxes are filed with the IRS.

Most LLCs in Washington don’t pay taxes directly to the IRS, as in the LLC doesn’t have what’s called a “separate return”. But instead, the LLC Members are responsible for reporting the income or losses from the LLC on their personal 1040 federal tax return.

Most LLCs’ income is reported on a Schedule C, however, you may need to include additional Schedules, depending on how your LLC earns income.

By “most LLCs”, we are specifically referring to LLCs taxed in their default status. By default, the IRS taxes Single-Member LLCs like a Sole Proprietorship. And by default, the IRS taxes Multi-Member LLCs like a Partnership.

Note: We highlighted the word “like a” since many people get confused when they see they word “Sole Proprietorship” next to their LLC. Many people think that by having their LLC taxed in this manner, that they are losing their LLC asset protection. This is not the case. For legal reasons, your LLC is still a separate legal entity from yourself. However, for federal tax purposes, the IRS just treats your LLC like either a Sole Proprietorship or a Partnership so they can collect tax revenue.

Alternatively, an LLC can elect to be taxed as a C-Corp by filing Form 8832, or more popularly, an LLC may elect to be taxed as an S-Corp by filing Form 2553 (in order to save money on self-employment taxes). In both cases, the LLC does have to file a “separate return” with the IRS.

If an LLC is taxed as a C-Corp, it must file federally, using Form 1120. If an LLC is taxed as an S-Corp, it must file federally, using Form 1120S.

LLC taxed as an S-Corp:
Typically, most accountants recommend that your Washington State LLC’s net income (income minus expenses, but not including salaries) be around $70,000 per year, plus or minus. At this net income level, the accounting and administrative costs of maintaining the S-Corp tax election for the LLC are offset by the self-employment tax savings. You will need to have an in-depth conversation with your accountant to see whether or not electing to have your LLC taxed as an S-Corp makes sense. Typically, it’s not a great idea for businesses just starting out (aka not generating a lot of profit).

State Taxes

State taxes are filed with the Washington Department of Revenue, the agency which collects taxes and pays for public services in the state.

Once you complete the Business License Application, your LLC will automatically be registered with the Department of Revenue.

State Income Tax

Washington doesn’t impose state income tax (like most states), however, there are other types of taxes that your LLC is responsible for:

• business & occupation tax (“B&O”)
• retail sales tax
• use tax
• property tax
• income tax (no state income tax in Washington)
• other industry-specific taxes

Local Taxes

Local taxes are usually filed with the county, city, town, and/or township, but this will vary depending on where you’re doing business.

Since Washington has 39 counties and over 280 different municipalities, things will vary widely here and you’ll need to work with an accountant in your area to determine what local tax obligations your Washington LLC needs to meet.

Sales Tax

Sales tax must be paid if your Washington LLC is selling retail products or providing certain services. Sales tax needs to be collected and paid by both brick-and-mortar stores as well as online sellers.

Sales tax rates are a combination of state sales tax plus the city (or county) sales tax. The amount that needs to be collected will depend on where your store is located or your buyer’s “ship to” address if you’re an online seller (Washington is a “destination based” sales tax state). You can find sales tax rates here: Washington sales tax rates.

Calculating sales tax and meeting your filing deadlines can be a major headache for business owners. Your accountant may be able to help, but many accountants stay away from sales tax and recommend hiring a company.

Need help with sales tax? To automate all of your Washington sales tax filings (sales tax and use tax), we recommend using TaxJar. They help online sellers as well as brick-and-mortar businesses.

TaxJar also has helpful guides on state sales tax: Sales Tax Guide for Businesses.

Business & Occupation (B&O) Tax

Washington State B&O Tax is a tax on the gross income of your Washington LLC. Gross income is income earned without deductions (like manufacturing costs or overhead expenses, for example)

Example: Your LLC-operated store sells a baseball bat that costs $20 to manufacture to a customer for $50. After the sale, your LLC can be said to have earned a gross income of $50. If you deduct the $20 manufacturing cost, then your LLC will have earned a net income of $30.

It doesn’t matter how your Washington LLC earns its income. The B&O tax is still due regardless of the type of activity used to generate income.

Your LLC’s B&O Tax rate will be based on the Washington Department of Revenue’s business classification (and will be determined during your Business License Application). The Department also keeps a classification of common business activities.

Where are B and O taxes reported?

Your Washington LLC’s B&O taxes are reported on the Business Excise Tax Return.

How often do I need to file B and O taxes?

Your tax filing frequency will be assigned to your LLC after you complete the Business License Application. Your LLC will be assigned a monthly, quarterly, or annual filing frequency.

We recommend getting help from your accountant to make sure you properly pay and file your LLC’s B&O Tax in Washington.

Payroll Taxes

If your Washington LLC will have employees, you must submit payroll tax. Payroll tax is essentially a bunch of taxes and filings, including:

• Federal income tax withholding
• State income tax withholding
• Social Security tax
• Medicare tax
• Federal unemployment taxes (FUTA)
• State unemployment taxes (SUTA)
• Local/county deductions
• Employee deductions

As an employer in Washington, you will need to set up payroll, withhold payroll taxes from employees’ paychecks, and then submit those filings and taxes to various state and government agencies.

Although you can file payroll taxes yourself, the calculations can be burdensome and very complex. And if done improperly can lead to penalties and fines. Most people hire a payroll company or ask their accountant for help.

Our favorite payroll company is Gusto Payroll. They’ll automate and take care of all your payroll taxes.

Accounting & managing your books

You can manage your Washington LLC’s accounting in Excel or Google Sheets, or you can use software to help automate things and save time.

Although you aren’t required to use accounting software, doing so has many benefits:

• easily separate business expenses from personal expenses
• helps reduce human error
• automatically produce various reports
• invoice clients and customers
• manage accounts receivable
• generate high-level reports
• create a reliable audit trail
• save your accountant administrative time
• be better prepared for an audit

The most popular accounting software is QuickBooks Online, by Intuit.

Matt Horwitz

Founder & Educator, LLC University®

Matt Horwitz has been the leading expert on LLC education for the past decade. He founded LLC University in 2010 after realizing people needed simple and actionable instructions to start an LLC that other companies weren't offering. He's cited by Entrepreneur Magazine, Yahoo Finance, and the US Chamber of Commerce, and was featured by CNBC and InventRight.
 
Matt holds a Bachelor's Degree in business from Drexel University with a concentration in business law. He performs extensive research and analysis to convert state laws into simple instructions anyone can follow to form their LLC - all for free! Read more about Matt Horwitz and LLC University.