Washington State Taxes for a Sole Proprietorship
Clarify the tax compliance journey for a Washington sole proprietor. This guide covers the essential steps for state registration, reporting, and payment.
A sole proprietorship in Washington is a business structure owned by one individual and is not legally separate from its owner. This means the owner is personally responsible for all business debts and obligations. Fulfilling your tax duties requires understanding state and local registration, the primary business taxes in Washington, and federal tax obligations.
State and Local Business Registration
Before conducting business, a sole proprietor must file a Business License Application, which is the central application for most state and many city licenses. Successful processing issues a nine-digit Unified Business Identifier (UBI) number, which is your business’s primary identifier for all interactions with Washington state agencies.
To complete the application online through the Department of Revenue’s “My DOR” portal, you will need to provide:
- Your Social Security Number (SSN) or Individual Taxpayer Identification Number (ITIN).
- A registered “Doing Business As” (DBA) or trade name, if operating under a name other than your own full legal name.
- A detailed description of your business activities, used to assign a North American Industry Classification System (NAICS) code.
- An estimate of your total annual gross revenue.
Key Washington State Business Taxes
Business & Occupation (B&O) Tax
Washington’s primary business tax is the Business and Occupation (B&O) tax, a gross receipts tax. Unlike an income tax, the B&O tax is calculated on the total revenue of the business without deductions for labor, materials, or other costs. The tax rate depends on the classification of your business activities. The most common classification is Service and Other Activities (1.5%), while others include Retailing (0.471%) and Wholesaling (0.484%). A business may have activities that fall into multiple classifications.
To assist smaller enterprises, the state offers a Small Business B&O Tax Credit. This credit can reduce or eliminate the B&O tax liability for businesses with lower gross incomes. For example, a business may owe no B&O tax if its annual income is below a certain threshold, but the credit phases out as income rises.
Retail Sales Tax
Sole proprietors selling tangible personal property, providing certain services like construction, or selling digital products to consumers must collect and remit retail sales tax. The statewide sales tax rate is 6.5%, but the total rate charged to a customer includes local sales taxes levied by cities and counties.
Washington uses a destination-based system for sales tax. This requires the seller to charge the sales tax rate effective at the buyer’s location—where the goods are delivered or the service is performed. The Department of Revenue provides an online tax rate lookup tool to help businesses determine the correct combined rate.
Use Tax
Use tax is the counterpart to the retail sales tax. A sole proprietor owes use tax on tangible personal property, digital goods, or services purchased for business or personal use when the seller did not collect Washington’s sales tax. This commonly occurs when buying items from out-of-state vendors.
The use tax rate is the same as the sales tax rate at the location where the business uses the item. For example, if you purchase office equipment online from a seller in another state and have it delivered to your Washington office, you are required to report and pay use tax on its value.
Federal Tax Obligations
Federal Income Tax
For federal tax purposes, a sole proprietorship is a “pass-through” entity, meaning the business itself is not taxed separately. Instead, the business’s income and expenses are reported on the owner’s personal federal income tax return, Form 1040. To do this, the sole proprietor must complete and attach Schedule C, “Profit or Loss from Business.”
On Schedule C, you list all business income and deduct allowable business expenses. The result is the net profit or loss for the business, which is then transferred to your Form 1040 and taxed at your individual income tax rates.
Self-Employment Tax
In addition to federal income tax, a sole proprietor must pay self-employment tax. This tax is the sole proprietor’s version of the Social Security and Medicare taxes paid by employees and their employers (FICA taxes). The self-employment tax is calculated on the net earnings from your business from Schedule C.
The tax is figured on Schedule SE, “Self-Employment Tax,” and attached to your Form 1040. The self-employment tax rate is 15.3%, which consists of 12.4% for Social Security up to an annual income limit and 2.9% for Medicare with no income limit. As a partial relief, you can deduct one-half of your self-employment tax when calculating your adjusted gross income on Form 1040.
Filing and Paying Your State Business Taxes
The Combined Excise Tax Return is the primary form for reporting state business taxes in Washington, including B&O tax, retail sales tax, and use tax. The Department of Revenue assigns a filing frequency—monthly, quarterly, or annually—based on your estimated tax liability. Monthly returns are due by the 25th of the following month, quarterly returns by the last day of the month after the quarter ends, and annual returns by April 15.
Filing is done online through the My DOR portal. You will enter your total gross receipts under the applicable B&O tax classifications and report your total taxable retail sales. Sales must be broken down by location code to ensure correct local tax distribution. The Small Business B&O Tax Credit is often calculated automatically by the system based on the income you report.
After reviewing the calculated tax, you submit the return and authorize payment from a bank account or credit card. You must file a return for every period, even if you had no business activity.