In Washington, you can establish a sole proprietorship without filing any legal documents with the Washington state government. There are four simple steps you should take:
- Choose a business name.
- File a trade name.
As a sole proprietor, your business profits are taxed as a part of your personal income. This makes the process simple, but can also expose you to personal liability in some cases.
Washington State does not have a personal income tax. Its tax structure includes the Business & Occupation Tax, sales and use taxes, property taxes, and industry-specific taxes. The Washington Department of Revenue administers over 60 different taxes.
Virtually all businesses in Washington pay the state business and occupation tax. This includes sole proprietors, whether nonprofit or for profit. The B&O tax is calculated on gross income.
Businesses making retail sales collect sales tax from their customers, then pay taxes periodically to the state. The current sales tax rate in Washington state is 6.5%. However, local sales tax rates vary by location.
Personal property taxes in Washington are collected by each county. Contact your county’s treasurer office for your rate and how to pay.
Sole proprietors must pay the entire self-employment tax amount themselves.
A sole proprietorship is owned by one person. An LLC offers liability protection and tax flexibility. Due to liability protection, an LLC is often better for a small business owner.
Businesses are required to file taxes electronically using My DOR, DOR’s online filing system, and pay electronically. Request a waiver if unable to file electronically.
What taxes do self-employed individuals pay in Washington State? Self-employment taxes in Washington can be complicated. Independent contractors often find it difficult to maximize deductions and submit taxes correctly.
The self-employment tax covers Social Security and Medicare payments. The total tax is 15.3%, with 12.4% covering Social Security and 2.9% covering Medicare. The Social Security percentage applies to the first $137,700 of 2020 earnings, while the Medicare tax applies to all earnings.
When taxes are due depends on multiple factors. If wages and tips total at least $160,200, the 12.4% Social Security part of the self-employment tax does not apply to net earnings. However, the 2.9% Medicare tax still applies to all net earnings.
Comparison with Other States and Federal Taxes
State taxes differ from federal taxes. Each state government can create its own tax code. For example, Washington has no state income tax, while California’s is 13.3%, the highest nationwide.
Employers pay State Unemployment Insurance (SUI) tax to fund unemployment benefits. SUI tax rates adjust annually based on an employer’s history and the overall unemployment fund balance. Rates vary by industry.
Additional Washington Tax Information
A new 0.58% payroll tax on employees earning over $100,000 annually starts January 1, 2022. Employers also pay state unemployment insurance tax up to $62,500 of taxable wages.
Self-employed individuals may qualify for deductions to save on taxes: rental assistance through Section 8 housing programs can lower taxable income, while business owners may deduct some expenses.
Sole proprietors typically use Schedule C to file their income taxes. After you fill out your Schedule C, all you’ll need to do is attach it to your personal tax form (Form 1040) and submit it by the correct deadline.
Sole proprietors must make contributions to the Social Security and Medicare systems; these contributions are called "self-employment taxes."
Sole proprietors can choose to incorporate their business and file taxes as a corporation. Unlike sole proprietorships, corporations are taxed as a separate legal entity and often have lower tax rates.