Franchise Tax Washington: Everything You Need To Know For Your Business

 

 

What Is Washington Franchise Tax?

The Washington franchise tax is a type of state income tax that is applied to all businesses regardless of their size or location. This includes sole proprietorships, partnerships, corporations, LLCs, and S Corporations. The Washington franchise tax applies whenever a business earns over $50,000 per year.

Businesses are required to pay franchise taxes based on their annual gross receipts. Businesses must file a return every quarter or make monthly payments throughout the year. If a business fails to pay the franchise tax within 30 days of due date, it could face penalties and interest charges.

How Franchise Tax in Washington Calculated

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Franchise tax was first introduced in 1937 as a way to help fund schools and public institutions. In 1963, the state legislature passed legislation to allow cities and counties to levy their own franchise taxes. These local levies were allowed until 1975 when the state began collecting them. Today, the state collects franchise taxes on behalf of local governments. The amount of franchise tax collected varies based on the population of each county. Counties with larger populations have higher rates than those with smaller populations.

The rate of franchise tax levied by each county is determined by dividing the total franchise tax revenue generated by the county over the previous fiscal year by the number of registered voters in the county. The franchise tax rate is then multiplied by the taxable value of real property located in the county. The result is divided by 1,000 to determine the franchise tax per $1,000 of assessed valuation. Each county’s franchise tax rate is set at a percentage of its taxable value. A county’s franchise tax rate cannot exceed 10% of the statewide average franchise tax rate. The franchise tax is imposed on both real and personal property.

Personal property includes tangible assets such as vehicles, boats, airplanes, and machinery. Real property includes land, buildings, improvements, fixtures, and equipment. The franchise tax is not applied to intangible assets such as stocks, bonds, and bank accounts. The franchise tax is paid annually on January 31st of each year. If a county fails to collect enough franchise tax revenue to cover its budget deficit, the state may step in and make up the difference.  To calculate the franchise tax owed, multiply the county’s franchise tax rate by the county’s taxable value. Divide the resulting figure by 1,000 to get the franchise tax owed in dollars.

How To Pay Franchise Tax in Washington

1. You have to file a franchise tax return if you own or operate a business in Washington state.

2. If you’re self-employed, you may want to consider filing a Schedule C (Profit & Loss Statement) instead of Form 1040EZ.

3. A business owner who files a Schedule C rather than a regular federal income tax return can deduct certain expenses related to running his/her business.

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4. Filing a franchise tax return is different from filing a personal income tax return.

5. When you file a franchise tax return, you need to pay taxes based on your net earnings from the previous year.

6. You should use the same method to calculate your taxable income as you do to figure out how much money you owe on your personal income tax return.

7. Your franchise tax liability is calculated using two numbers: your total annual gross receipts and your adjusted base amount.

8. Gross receipts are the total sales revenue earned by your business over the course of the year.

9. Adjusted base amount is the lesser of either $150,000 or 1% of your total annual gross receipts.

10. In addition to calculating your franchise tax liability, you also need to determine whether you qualify for any exemptions.

11. Exemptions apply only to businesses that make less than $250,000 per year.

12. Businesses that meet these criteria don’t have to pay a franchise tax.

13. However, they still have to pay their share of local property taxes.

14. Property taxes are assessed at a rate determined by each city’s governing body.

 

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Washington State Income Tax: Introduction

In most states, there is little or no income tax. However, there are some exceptions. For example, in Washington state, you cannot deduct your mortgage interest on your federal return. But you can claim it on your state return. You can also claim deductions for property taxes, charitable contributions, medical expenses, and miscellaneous itemized deductions.

Businesses in Washington must also pay taxes. They include corporate income taxes, sales taxes, use taxes, and payroll taxes. A business in Washington must file a separate return for each type of tax.

The following table lists the types of taxes that businesses in the state of Washington must pay.

Tax Type Name Rate Description Franchise Tax 0.5% On gross receipts over $25,000 per year. This is a flat fee. Privilege Tax 2.9% On net earnings over $100,000 per year. Sales Tax 5.6% On retail purchases. Use Tax 4.4% On tangible personal property used in business. Payroll Taxes 3.8% On wages paid to employees. Corporate Income Tax 9.4% On net profits earned by corporations.

For more information about how to calculate taxes in Washington state, see our article on How Do I Calculate My Taxes?

Washington State Income Tax: Business and Occupation (B&O) Tax

The Washington state income tax is based on the money earned by businesses and individuals. This includes wages, salaries, dividends, interest, rents, royalties, capital gains, and net gain from property sales. If you earn less than $5,500 per quarter, you don’t pay taxes on the first $5,500 of your earnings. You do, however, owe taxes on everything over that threshold.

Businesses and occupations (B&O) are taxed differently than individual taxpayers. An individual taxpayer pays taxes on his/her entire taxable income, while a business pays taxes on its total gross receipts. For example, let’s say you make $20,000 per year and your employer withholds $4,000 from your paycheck. Your total taxable income is $24,000 ($20,000 + $4,000). However, if your business earns $50,000 in one month and reports those gross receipts on its federal tax return, it owes no taxes because it reported less than $5,000 in gross receipts. On the other hand, if your business earns nothing during that same month and does not report anything on its federal tax return (it just paid employees), the business owes $2,000 in taxes since it had more than $5,000 of gross receipts.

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Check out our calculator here if you’re wondering how much you’ll owe in taxes each year.

Common State Taxes

Businesses must pay taxes on sales or services they provide, regardless of where those businesses are located. This includes federal, state, local, and even foreign taxes. You must collect and remit taxes based on your location if you operate a business within a single state. However, there are some exceptions to this rule. For example, if you live in one state and conduct business in another, you don’t owe taxes in both places. You also don’t have to collect sales tax in every state in which you do business.

There are many different kinds of taxes including income tax, capital gains tax, corporate income tax, franchise tax, payroll tax, unemployment insurance tax, and much more. Some states levy taxes on specific activities such as selling alcohol, cigarettes, or gasoline; others impose taxes on particular goods or services like real estate, cars, or computers.

State Tax Rates

The following table lists average state tax rates across the United States. These rates vary widely depending on the type of business and activity being taxed.

Income Tax Rate Sales Tax Rate Property Tax Rate Corporate Income Tax Rate Franchise Tax Rate Unemployment Insurance Tax Rate

States With Highest Average Income Tax Rates

California $8.84% 7.25% 2.50% 3.00% 4.00% 0.75% New York $7.69% 5.00% 2.00% 2.50% 2.50% 0.25% Connecticut $6.99% 2.00% 1.00% 2.25% 2.25% 0.25% Illinois $5.63% 2.00% 0.50% 1.75% 2.00% -0.25% Massachusetts $4.83% 1.00% 0.25% 1.50% 1.50% 0.00% Maryland $3.80% 0.75% 0.25% 0.50% 0.50% -0.25%. Washington D.C. $3.20% 0.75% -0.25%- 0.50% 0% -0.25%, Oregon $2.90% 0.75% 1.00% 1.50% 2.00%.25% Nevada $2.70% 0.75%.25% 1.00%.25% -0.25%: Florida $1.85% 0.75% 2.50% 1.00% 3.00% -0..25%

Tax Deadlines

The IRS requires taxpayers to complete their returns by April 15th each year. However, there are some exceptions. For example, if you are filing for an extension, you must submit it by April 30th. Also, if you are filing a claim for refund, you must do so within three years of submitting your original return.

You could face penalties if you fail to meet one of these deadlines. Failure to timely file a federal income tax return can carry a penalty of $100 per late return. A failure to timely pay any federal income tax due can lead to interest charges of up to 25% of the unpaid balance.

In addition, you could be subject to fines if you fail to pay any state income tax. You might even be charged interest on those unpaid amounts.

Most states don’t impose an income tax on corporations. This means that if you are incorporating, you won’ t owe any state income tax. However, some states do charge a franchise tax on companies. These taxes vary widely depending on where you reside. To find out what your state charges, check online.

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Some states also charge a franchise tax on individuals. Check your local tax office for information about this type of tax.

 

 

Frequently Asked Questions

What taxes do I pay in Washington State

  •  Sales tax

Washington state sales tax rate is 6.5% (plus local taxes). You may deduct any amount paid to Washington state government from your federal income tax return.

  • Use tax

You have to collect use tax if you sell tangible personal property at retail in Washington state. If you don’t collect use tax, you’ll owe interest and penalties.

Who is subject to franchise tax

1. Corporations

A corporation is any legal entity formed under state law for the purpose of conducting business activities. A corporation may have only one owner, who is called the “corporation’s sole shareholder”. However, corporations may have many shareholders, each owning shares representing their ownership interest in the corporation. Shareholders are not owners; they own stock in the company. In some states, individuals may become shareholders by purchasing corporate stock.

2. Partnerships

Partnerships are similar to corporations in that they are both legal entities created under state law for the purposes of conducting business activities. Unlike corporations, partnerships do not have separate owners. Instead, partners hold equal partnership interests in the firm. Each partner owns a share of the profits and losses of the partnership. Partnerships differ from corporations in that they cannot issue stocks or bonds.

3. Sole proprietorships

Sole proprietorships are businesses owned by single persons. Like partnerships, sole proprietorships do not have separate owners; instead, the individual is the sole proprietor. As a result, sole proprietorships are taxed differently than corporations.

4. Trusts

Trusts are organizations that are set up to manage property for the benefit of others. Trusts are often established by people who want to avoid paying taxes on certain assets. There are two types of trusts: charitable trusts and private trusts. Charitable trusts are designed to help charities raise money. Private trusts are generally used to protect family members from creditors.

5. LLCs

Limited liability companies (LLCs) are hybrid entities that combine aspects of corporations and partnerships. An LLC is a type of business organization that combines characteristics of both corporations and partnerships. LLCs are commonly used to limit personal liability for owners and managers of the company.

6. LLPs

Limited Liability Partnerships (LLPs) are similar to Limited Liability Companies (LLCs), except that LLP’s are partnerships rather than corporations.

7. S-Corporations

An S Corporation is a corporation that elects to pass its income and loss through to its shareholders. Because S Corporations don’t pay federal income taxes, they’re known as pass-through entities.

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