Here’s the pitch every formation service loves to make: “Washington has no state income tax!” And they’re right. But after helping over 400 Washington businesses understand their actual tax obligations, I can tell you the full story is more complicated—and more expensive—than that headline suggests.
Washington doesn’t tax your income, but they absolutely tax your business. The B&O tax is their clever workaround, and if you’re not prepared for it, you’ll get a nasty surprise when you realize “no income tax” doesn’t mean “no taxes.”
Let me walk you through what you’re really signing up for with a Washington LLC, from the genuinely good news to the gotchas nobody mentions until it’s too late.
The Washington Tax Trade-Off
Washington made a deal with businesses: we won’t tax your profits, but we’ll tax your gross receipts. It’s like a restaurant that doesn’t charge for dessert but doubles the price of entrees.
Your Washington LLC faces:
- Federal taxes (no escape anywhere)
- Business & Occupation (B&O) tax (the sneaky one)
- Sales tax obligations (among the highest in the nation)
- Payroll taxes (minus state withholding)
- Local B&O taxes (yes, cities want their cut too)
- Annual report fees ($90, reasonable by West Coast standards)
A Seattle tech founder once told me, “Jake, I moved here from California to save on taxes.” I asked him about his B&O tax bill. His face told me everything I needed to know.
Pass-Through Taxation: Washington Plays Nice
At least Washington doesn’t complicate federal pass-through treatment. Your LLC’s profits flow directly to your personal return without state-level interference. It’s clean, simple, and one less form to file.
But here’s what people miss: no state income tax means no state deductions either. That home office deduction that saves you money federally? Washington doesn’t care because they’re not taxing that income anyway.
Federal Tax Elections in the Evergreen State
Your federal options remain standard, but the calculations change when there’s no state income tax:
Default Classifications: Simple by Design
Single-member LLC: Disregarded entity status means Schedule C income on your 1040. No state return needed. It’s the simplest tax structure you can have in Washington.
Multi-member LLC: Partnership taxation with Form 1065 and K-1s. Still no state partnership return required. One less layer of complexity compared to most states.
The Marriage Bonus: Washington is a community property state, which means married couples can elect qualified joint venture status. Skip the partnership return, file as a single-member LLC. It’s one of the few perks of Washington’s community property laws.
S-Corp Election: Different Math Without State Income Tax
Here’s where Washington gets interesting. Without state income tax, the S-Corp calculation changes. You’re only saving on federal self-employment tax, not state taxes.
The magic number in Washington? Around $80,000-$90,000 net profit per member. Higher than states with income tax because you’re only optimizing for federal savings.
A Tacoma consultant netting $100,000 saved $5,500 annually through S-Corp election. No state tax complications, just pure federal savings. But remember: you still pay B&O tax on gross receipts regardless of your tax election.
Tip: Choosing S-Corporation tax status comes with added costs and responsibilities. For most new LLCs, it’s best to wait until the business is stable with reliable revenue. Once each Member’s annual net income reaches around $70,000, talk to your accountant about whether this option makes sense.
C-Corp Election: The Seattle Startup Special
In Washington’s tech ecosystem, C-Corp election for LLCs makes more sense than most places. Between Seattle and Bellevue, I’ve worked with five LLCs that went C-Corp for venture funding. If you’re building the next Amazon, this might be your path.
The B&O Tax: Washington’s Gross Receipts Gotcha
This is where Washington gets its money. The Business & Occupation tax doesn’t care about your profits—it taxes your gross receipts. Made $1 million but lost money? Too bad, pay up.
The rates vary by classification:
- Retailing: 0.471%
- Wholesaling: 0.484%
- Services: 1.5% to 1.75%
- Manufacturing: 0.484%
Doesn’t sound like much? Let’s do math. A service business with $500,000 in gross receipts owes $7,500 in B&O tax even if they barely broke even. That’s real money.
The Small Business Credit
Washington throws small businesses a bone with a credit that can reduce or eliminate B&O tax for businesses with less than roughly $125,000 in annual gross receipts. But here’s the catch: you still have to file returns even if you owe nothing.
One Spokane contractor didn’t file for two years because he was under the threshold. The penalties for not filing? More than the tax would have been.
Multiple Activities Nightmare
Run a business that does multiple things? Welcome to B&O tax hell. That coffee shop that also roasts beans and sells retail? Three different tax classifications, three different rates, one complicated return.
I worked with a Bellingham business that had five different B&O classifications. Their quarterly filing looked like a tax law exam.
Local B&O Taxes: The City Shakedown
Seattle, Tacoma, Bellevue, and about 40 other cities impose their own B&O taxes. Rates vary, thresholds differ, and yes, you need to file separately with each city.
Seattle’s tax alone can hit 0.222% for most businesses. Operating in multiple cities? Congratulations, you’re now a part-time tax compliance officer.
A Redmond software company discovered they owed B&O tax to four different cities based on where their employees worked. Their annual compliance cost tripled overnight.
Sales Tax: The 6.5% Minimum Reality
Washington’s base sales tax is 6.5%, but with local additions, it can exceed 10%. That’s among the highest in the nation, and unlike Oregon next door, there’s no escape.
What’s taxable gets complicated:
- Physical products? Taxable
- Digital products? Usually taxable (Washington was early to this party)
- Services? Depends (consulting usually not, but many services are)
- Software? Depends on delivery method
One e-commerce client thought drop-shipping from Oregon meant no Washington sales tax. Wrong. If the customer is in Washington, you’re collecting Washington sales tax.
The Annual Report: Washington’s Reasonable Fee
At $90 annually, Washington’s annual report is actually reasonable. It’s due on the formation anniversary month, takes five minutes online, and keeps your LLC in good standing.
Miss it? Your LLC gets administratively dissolved. Reinstatement isn’t terrible, but why create problems? Set a reminder or have your registered agent handle it.
Payroll Taxes: The Simplified Version
Here’s actual good news: no state income tax means no state withholding. Your payroll just got simpler. You still handle:
- Federal withholding
- FICA taxes
- Federal and state unemployment
- Workers’ compensation (state fund or private)
- Paid Family and Medical Leave (state program)
But compared to California or New York, Washington payroll is a breeze. One less withholding calculation, one less deposit schedule, one less form.
Strategic Planning for Washington LLCs
After years working with Washington businesses, here’s what actually matters:
Understand gross vs. net: B&O tax on gross receipts means high-volume, low-margin businesses get killed. Plan accordingly.
Track nexus carefully: Selling to other states? You might escape their income tax but not their sales tax.
Municipal compliance: Know which cities you’re doing business in. City B&O taxes add up fast.
Federal optimization: Without state income tax, federal tax planning becomes even more important.
Business structure: Sometimes multiple LLCs make sense to optimize B&O tax classifications.
Common Washington LLC Tax Disasters
The “no taxes” assumption: No income tax doesn’t mean no taxes. B&O tax is real and substantial.
Ignoring city taxes: That Seattle B&O tax isn’t optional just because you’re based in Everett.
Nexus negligence: Selling online doesn’t exempt you from sales tax collection.
Classification confusion: Using the wrong B&O classification can trigger audits and penalties.
The Oregon shopping myth: Buying supplies in Oregon to avoid sales tax? Washington has use tax for that.
When Professional Help Pays for Itself
You need a Washington tax professional when:
- Gross receipts exceed $250,000 (B&O gets complex)
- You operate in multiple cities
- You have multiple business activities
- You’re considering S-Corp election
- You sell across state lines
- You receive any DOR notice
A good Washington CPA costs $1,500-$3,000 annually but saves multiples in optimized classifications and avoided penalties.
Resources That Actually Work
Washington Department of Revenue: 360-705-6705 (Surprisingly helpful)
DOR Online Services: Actually works well for filing
IRS Business Line: 1-800-829-4933 (Press 1, 1, then 3)
Seattle B&O Tax: 206-684-8484 (For city tax questions)
The Bottom Line on Washington LLC Taxes
Washington’s tax system is a trade-off, not a free ride. No state income tax is genuinely valuable, especially for high earners. But the B&O tax on gross receipts can be brutal for high-volume, low-margin businesses.
The key is understanding what you’re getting into. Washington doesn’t hide its tax structure—it’s just different from what most people expect. Plan for B&O tax, budget for it, and price it into your business model.
For the right business, Washington’s tax structure is advantageous. Service businesses with high margins do well. Tech companies benefit from no income tax on stock options. Consultants keep more of their earnings.
But if you’re running a low-margin retail operation or wholesale business? That B&O tax might hurt more than income tax would have.
Remember: Washington built its tax system to attract certain businesses and discourage others. Figure out which category you’re in before you form that LLC, not after.
The entrepreneurs who thrive in Washington aren’t the ones who came for “no taxes”—they’re the ones who understood the actual tax structure and built their business model accordingly.
Jake Lawson has guided over 1,200 businesses through formation and tax compliance, with extensive experience in no-income-tax states like Washington, Texas, and Nevada. When he’s not explaining why B&O tax isn’t optional, he’s probably telling someone that moving to Oregon won’t eliminate their Washington tax obligations. Need the real story on Washington LLC taxes? Get it at llciyo.com.