Tax law treats business owners very differently from employees. In the great state of Washington, many employees only have to worry about federal taxes because there’s no personal state income tax. Sure, there’s sales tax, but there’s no requirement to keep track of sales tax that you pay personally — you can just use the IRS sales tax estimator*.
*(It’s still a good idea to keep receipts for major purchases such as a car, house, or boat because you may be able to add that sales tax on top of the estimated amount on your 1040 for a larger deduction.)
Note that we said that there’s no personal state income tax. There is, however, a business state income tax. It’s called the Business & Occupation (B&O) tax, and we’ll get into further detail about it below. Depending on where you live, you may also owe local income taxes. Seattleites take heed!
Let’s start at a bird’s-eye view of Federal requirements before we progressively “zoom in” on city taxes.
Federal Taxes for Your Business
As a business owner, you are subject to Federal income tax on your business income in addition to your personal income. The way you report your Federal income tax depends on what kind of entity your business is. If you are a(n):
- Sole Proprietorship (the default if you are solo or run your business as a married couple): Report your income on Schedule C of your 1040.
- Partnership: Use Form 1065 for your business’s taxes. Your share of the partnership income will flow through to your 1040 via Schedule K-1.
- S-Corporation: File your taxes using Form 1120-S. Your share of the income will flow through to your 1040 via Schedule K-1. It is possible to be a single-member S-Corporation.
- C-Corporation: File your taxes using Form 1120. Your corporation itself will pay income tax on the 1120. If the corporation elects to pay dividends, then you will receive a 1099-DIV from it. Report this income on your 1040 and pay taxes on it.
- LLC: The tax treatment of an LLC depends on how it elects to be taxed. An LLC can be taxed as a Partnership, an S-Corporation, or a C-Corporation.
[Note that out of all of the above tax forms, you only actually pay taxes on your 1040 or 1120.]
It is important to note that as a self-employed person, you are required to pay both the employee and the employer portion of FICA payroll taxes (the two 7.65% halves of Federal payroll tax). Use Schedule SE on your 1040 to sort this out.
Finally, you will likely be required to pay estimated Federal income taxes depending on your income. These payments are paid using form 1040-ES and are due on April 15th, June 15th, and September 15th of the current year, and January 15th of the following year.
There are penalties for underpaying your estimated taxes, so we recommend that you hire a tax specialist (like us!) to help with your estimates. Alternately, you can pay 100% of your prior year’s total tax liability split into 4 equal payments and the IRS pinky-promises not to charge you underpayment penalties. If your adjusted gross income is over $150,000, you’re required to pay up to 110% of the prior year’s total tax liability.
If you are an employer, you “enjoy” a whole host of additional taxes, such as payroll taxes.
State Taxes for Your Business
As stated above, there is no personal state income tax in Washington State. Business owners, though, must pay state B&O tax. This is a tax based on your business revenue, and as such it does not allow most expense deductions. You can deduct missing revenue though: bad debts and customer refunds are acceptable deductions for your B&O taxes.
State B&O tax is due either annually, quarterly, or monthly depending on your business income. The default is annual taxation, and the state will notify you if you need to file more frequently. You may not know this, but you can request to reduce your filing frequency and the State might comply if your income falls below the threshold for your current filing frequency. We at TL;DR Accounting have successfully done this on behalf of our clients before.
In addition to state B&O tax, you must file your Washington State business license annually. This is generally a simple process and it isn’t terribly expensive. Make sure to report any major changes like a change of address or ownership. You can file your B&O and renew your business license online at the WA Department of Revenue website.
Local Taxes for Your Business
Many cities in Washington State have their own local B&O tax — Seattle is a prime example. Many cities have signed up for FileLocal, which you can use as a convenient way to file, but there are still cities in Washington that have not set this up yet. Unfortunately, businesses in these cities must file on paper. Local B&O tax is often a quick and simple filing: just don’t forget to file on time!
Note that you can give your tax specialist access to your state and local tax filing websites, and they can file your taxes for you. All you will need to do is sign in to pay.
After all of this, you might be wondering: What about county tax? In Washington State at least, counties collect on property tax. You may have already paid county property tax on your house. If your business does not own real estate, it may still be subject to county Business Personal Property tax. “Personal Property” here is a bit of a misnomer because it’s not your personal property — it’s your business’s property that is not land or real estate. See your county’s Department of Revenue website for more details or contact us!
TL;DR: If you’re a new business owner, it’s time to think differently than you did as an employee (if you’ve been one before). In addition to Federal income tax (filing depends on your entity type), you now must pay two or three additional “locational” taxes. State business tax in Washington is based on revenue and applies to all businesses making over a certain threshold. Local business tax only applies if you do business in certain cities. County tax is based on the property your business holds. There’s good reason why so many businesses hire outside help with their taxes! If you need any help, feel free to schedule a chat with us any time.