What Is Washington Franchise Tax?
The Washington franchise tax is a type of state tax designed for business income.3 min read updated on February 01, 2023
The Washington franchise tax is a type of state tax designed for business income. How a business's income is taxed is based partially on the business's legal form. In many states, corporations have a corporate income tax. Income derived from “pass-through entities” like sole proprietorships, S corporations, partnerships, and limited liability companies (LLCs) are taxed by the state on personal income.
Washington State Income Tax: Introduction
Tax rates for personal and business income differ between states. Corporate rates are 4 to 9 percent, although they don't change much. Personal income rates can range from 0 to 9 percent, although the numbers can vary based on the type of income. Washington, Nevada, Wyoming, and South Dakota do not have a business income tax. These states, as well as Texas, Alaska, and Florida, also have no personal income tax. People in Tennessee and New Hampshire are only taxed on dividend and interest income.
A number of states require a separate tax on some businesses, besides what comes from personal income tax or corporate income tax. This separate tax is called “privilege tax” or “franchise tax." This tax is for the "privilege" or right to do business in certain states. A state's franchise tax is based on some part of the legal part of the business, as similar to business state taxes. Franchise taxes usually are flat fees or a sum based on the net worth of the business.
One of the four states that do not have a personal income tax or corporate tax is Washington, although this does not mean businesses in Washington state don't have to pay any taxes.
Washington State Income Tax: Business and Occupation (B&O) Tax
Even though Washington does not have personal income or tax business income, the state is taxed on gross receipts through their business and occupation tax (B&O tax). The 11th best tax climate for businesses in the United States is Washington, according to the Tax Foundation. No deductions are made for business expenses unless you do business in another state. If you did business in Portland, for example, you would pay income taxes in Oregon, then claim a deduction on gross receipts made in Oregon.
Gross receipts can include gross proceeds of sales, the value of products, or the gross income of a business for occupation and business taxes. "Gross receipts" mean there are no deductions for the cost of business dealings (like materials, taxes, and labor expenses), so the B&O tax is valid no matter if the business made a profit or not.
Occupation and business tax rates differ based on the classification of the business. Knowing how to correctly classify your business is very important. The B&O tax is a tax on gross receipts that is managed by the Department of Revenue and is put into effect on businesses in the state of Washington. This tax is relevant to all kinds of businesses, such as partnerships, sole proprietorships, S corporations, and C corporations. The B&O tax is placed on a seller's gross receipts taken from the business activities done in Washington.
Common State Taxes
Salaries, the cost of sold goods, salaries, and other related costs have no deductions, except for some credits and exemptions. The Department of Revenue supplies a list of tax classifications for business activities that are common for almost 30 items. These are the tax rates of four very common business classes:
- Manufacturing: .484 percent
- Retailing: 0.471 percent
- Service and other activities: 1.8 percent
- Wholesaling: .484 percent
On July 1, 2013, a decrease of 1.5 percent on service and other activities will occur. For the most part, B&O tax rates range from .13 percent all the way to 3.30 percent, based on the classification of the business. Some activities are exempt from the B&O tax, such as food manufacturing and food processing businesses.
B&O tax returns might be due quarterly, monthly, or yearly based on the estimated tax liability of your business. An annual filing must occur when the estimated tax liability reaches no more than $1,050 per year. A quarterly filing must be done for businesses whose estimated tax liability goes between $1,050 and $4,800 a year. Monthly filings occur when the estimated tax liability is more than $4,800 a year.
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