What is the Tax Burden and Compliance Requirements to Operate as a Service Provider in Washington?
In Washington State, self employed owners and service providers are subject to a 1.5% B&O tax. This is also called Excise tax, or state tax. The 1.5% tax is assessed on all receipts or income earned by the business, and the state does not allow you to claim any expenses as deductions. The Washington State Department of Revenue (DOR) governs the B&O taxation, and will allow you to write off small business credits for certain amounts of income.
What does it Take to Become Registered in Washington State?
First, you will need to register your desired entity name with the Secretary of State in Washington, and this name must be available on the Secretary of State’s database. Once the name is approved and accepted, you then move on to the MBLA.
In order to be registered with the DOR and pay B&O, you must file the Master Business License Application (MBLA) with the Department of Licensing to register to do business in the state of Washington. When filling out the MBLA, ,make sure to indicate that you expect to earn revenue. This triggers the DOR to issue you a PAC code, which is used to set up your B&O Tax payment account. If you fail to indicate this correctly, and you do indeed earn revenue, you will need to file an Amended MBLA to correct the issue. The MBLA will include questions about:
· Business and Owners names
· Legal Business Address
· Percentage of Ownership for each owner
· Main Business Activity
· Upcoming Year’s Revenue Projection
· Expected Number of Employees and Subcontractors
Once the MBLA is accepted, you will also receive your UBI Number, and the DOR will open accounts for you at the Department of Labor & Industries, as well as the Employment Security Department. If you are an owner-only s-corp, you are exempt from paying L&I, and you can send a letter to both departments indicating that you have no employees, and you don’t intend to hire any.
What is the Difference Between an EIN and a UBI? Do I Need Both?
While the UBI is the state level ID number, the EIN is for the federal level. You can apply for an EIN with any business entity structure, at any time. EIN allows your company to use a tax ID number that is not your Social Security Number. You can use your EIN to set up a business bank account, as well as apply for a business credit card. This helps disconnect your business activities from your personal activities, as well separate your financial records effectively. It is our recommendation that every business entity apply for an EIN – you can use the IRS SS-4 Form, available from the IRS website.
Creating a new entity in Washington state requires many steps, and sometimes, a single checkbox is the difference between being fully compliant, and not being able to pay your state taxes. Consulting with a professional is likely to save you a lot of headache in the future.