How Your LLC Will Be Taxed
In this guide, we’ll cover the main business taxes required in Washington, including payroll, self-employment and federal taxes. The profits of an LLC aren’t taxed at the business level like C Corporations. Instead, taxes are as follows:
State Taxes for LLCs
There are three main types of state tax you must pay to the Washington Department of Revenue: business and occupation, retail sales, and use taxes.
Washington Income Tax
Washington state does not have a personal or corporate income tax. However, people or businesses that engage in business in Washington are subject to business and occupation (B&O) and/or public utility tax. The business’s gross receipts determine the amount of tax they are required to pay. Businesses that make retail sales or provide retail services may be required to collect and submit retail sales tax.
Washington Business and Occupation (B&O) Tax
The state B&O tax is a gross receipts tax. It is measured on the value of products, gross proceeds of sale, or gross income of the business. Washington’s B&O tax is calculated on the gross income from activities, meaning there are no deductions from the B&O tax for labor, materials, taxes, or other costs of doing business.
The B&O tax rate varies by classification. Once you know which classification your business fits into you can find the rate that corresponds to your classification on the Department of Revenue’s list of B&O tax rates.
Washington Retail Sales Tax
If you sell physical products or certain types of services, you may need to collect retail sales tax and then pay it to the Washington's Department of Revenue. Washington retail sales tax is collected at the point of purchase. The listed retail sales tax rate for Washington is 6.5%, but could vary depending on the region, county or city where you're located.
Most states do not levy sales tax on goods that are considered necessities, like food, medications, clothing or gas. Check with the Department of Revenue to confirm whether your business is required to collect Washington retail sales tax.
Washington Use Tax
Use tax is a tax on the use of goods or certain services in Washington when sales tax has not been paid. Goods used in this state are subject to either sales or use tax, but not both. Thus, the use tax compensates when sales tax has not been paid.
Use tax is due if:
- Goods are purchased in another state that does not have a sales tax or a state with a sales tax lower than Washington’s. For example, items you purchase in Oregon that are used in Washington are subject to use tax.
- Goods are purchased from someone who is not authorized to collect sales tax. For example, purchases of furniture from an individual through a newspaper classified ad or a purchase of artwork from an individual collector.
- Goods are purchased out of state by subscription, on the Internet, or from a mail order catalog company. Many of these companies collect Washington’s sales tax, but if the company from which you order does not, you owe the use tax.
- Personal property is acquired with the purchase of real property.
Federal Taxes for LLCs
As the owner of an LLC, you must pay self-employment tax and federal income tax, both of which are levied as “pass-through taxation."
Federal taxes can be complicated, so speak to your accountant or professional tax preparer to ensure that your Washington LLC is paying the correct amount.
Federal Self-Employment Tax
All members or managers who take profits out of the LLC must pay self-employment tax. This tax is administered by the Federal Insurance Contributions Act (FICA), and covers Social Security, Medicare and other benefits. The current self-employment tax rate is 15.3 percent.
You’ll be able to deduct some of your business expenses from your income when calculating how much self-employment tax you owe.
Here are some examples of how much self-employment tax you may need to pay, depending on your earnings:
- On profits of $50,000, you would pay self-employment tax of $7,650
- On profits of $70,000, you would pay self-employment tax of $10,710
- On profits of $90,000, you would pay self-employment tax of $13,770
- On profits of $120,000, you would pay self-employment tax of $18,360
Pay Less Self-Employment Tax by Treating Your LLC as an S Corporation
The Internal Revenue Service allows an LLC to be treated as an S Corporation for tax purposes, provided your business meets certain requirements. This can help you reduce the amount of self-employment tax you pay by allowing you to declare some of your income as salary and other income as distributions or withdrawals.
Speak to your accountant or professional tax preparer for more information on reducing your LLC self-employment tax through an S Corporation tax election.
You can do this by making an “S Corporation Tax Election” with the IRS using Form 2553. We can file your Form 2553 with the IRS on your behalf.
Federal Income Tax
You must also pay regular federal income tax on any earnings you take out of your LLC. The amount of income tax you pay depends on your earnings, current income tax bracket, deductions and filing status.
You only pay federal income tax on profits you take out of the business, less certain deductions and allowances. This includes your tax-free amount, plus business expenses and other deductions for things such as healthcare and some retirement plans.
Speak to your accountant for more information.
Employee and Employer Taxes
If you pay employees, there are some slightly different tax implications. Speak to your accountant to get clear guidance for your unique situation.
Employees May Need to File Tax Returns
Regardless of whether you withhold federal income tax, your employees may need to file their own tax returns.
Employee Insurance and Other Requirements
You may also need to pay insurance for any employees, such as employee compensation insurance or unemployment tax.
Other Taxes and Duties
Depending on your industry, you may be liable for certain other taxes and duties. For example, if you sell gasoline, you may need to pay a tax on any fuel you sell. Likewise, if you import or export goods, you may need to pay certain duties.
Speak to your accountant about any other taxes or duties you may need to withhold or pay.
Estimated Taxes for Your LLC
Most LLCs must pay estimated taxes throughout the year, depending on the amount of profit and income you expect to make.
The most common types of estimated tax are: