How Does Washington Income Tax Work?

Washington’s lack of a personal income tax may give the impression that payroll management should be simple. The reality is that multi-state teams and local payroll obligations can make it unexpectedly complex.

Without crucial insights into Washington’s tax structure, businesses can make costly mistakes. Understanding the state’s requirements is key to staying on top of state and local taxes and preventing compliance gaps.

Deel has worked with employers across US states, so we know the complexity of managing payroll in places with and without income taxes. In this article, we explore how Washington’s tax system works and how employers can stay compliant.

Does Washington have state income tax?

Washington has no income tax at the state or local level. The state constitution rules that income is classified as property, effectively banning taxes on wages and salaries. This makes Washington one of only nine states with no income tax.

To generate revenue, Washington relies on alternative taxes, including:

• Capital gains: A 7% excise tax on the sale or exchange of long-term capital assets like stock, bonds, and real estate
• Business and Occupation (B&O): A gross receipts tax based on the value of products, gross proceeds of sale, or gross income of your company
• Sales and use: Washington applies sales tax when people buy products and services within the state, and use tax when items are purchased elsewhere

Some Washington cities have also introduced local payroll or business taxes. Most notably, Seattle passed legislation in 2021 that increases the payroll expense tax for larger companies.

How income tax works in Washington state

The Washington State Department of Revenue (DOR) handles most taxes but doesn’t administer or collect any personal income tax.

For businesses, this means no income tax filings or remittances to the state. Your US payroll system only needs to process federal withholdings for employees in the area.

However, new employers still need to register with the Washington DOR to manage other taxes. You can sign up on the website once you’ve obtained a business license.

Employers also need to make state-mandated contributions, such as Unemployment Insurance and Paid Family and Medical Leave (PFML). These may be separate from the DOR, but they’re still part of your ongoing payroll obligations within the state.

Residency rules and filing status

Understanding the tax residency rules in Washington is crucial for employers. It decides whether or not employees pay income taxes, and your company must make contributions to local benefits programs.

Washington determines an individual’s residency status through multiple criteria:

• Residences for personal use (including motor homes and boats)
• Registration to vote
• Addresses used to pay federal or state taxes
• State benefits received
• Professional and business licenses
• Driver’s licenses
• Children in schools
• Attendance in a school or payment of tuition fees

Employees who meet any criteria here and don’t have residency elsewhere don’t need to pay state income taxes.

Note that Washington allows individuals to have residency in two states. If a worker primarily lives elsewhere but meets one of the criteria, they may still be eligible for benefits.

Because there’s no income tax, Washington hasn’t established any filing statuses. Individuals only need to determine statuses like single, joint, or head of household for federal income tax returns.

Tax obligations for Washington-based businesses

Corporate tax obligations are based on registration and economic presence in Washington. If you conduct business activities or hire workers within the state, you’re typically required to pay some local taxes.

See also: State Tax Reciprocity: Filing Your Taxes Made Easy

Washington income tax rates and brackets

Washington has no personal income tax, so there are no brackets or rates for individual filers.

However, individuals and businesses still have other obligations to the state. Here’s an overview of the main taxes and contributions to be aware of:

Washington income tax deductions and credits

Individuals can’t claim state-level deductions or credits because there’s no personal income tax return. They can only claim itemized deductions on their federal taxes.

However, they may qualify for other state-administered benefits that reduce their tax burden, such as:

• Working Families Tax Credit (WFTC): Individuals and families may receive up to $1,290 in credits if they meet certain criteria
• Property tax relief: People may be eligible for an exemption or deferral on their property taxes if they’re elderly, disabled, widowed, or on a limited income. Nonprofit organizations might also qualify
• Sales tax exemptions: Certain products are automatically exempt from sales tax, such as farming or medical equipment

Corporate tax benefits

Once you’ve registered your business in Washington, you may qualify for exemptions and incentives to offset your tax bill.

• Qualified Family-Owned Small Business deduction: Families passing business property to one another may qualify for a deduction of up to $11,095,000 on capital gains tax
• B&O tax credits: Employers can claim tax credits for certain types of business activities or hiring veterans
• Small business tax credit: If your tax liability falls under the annual threshold, you can also claim a tax credit
• Multiple Activities Tax Credit (MATC): When you perform more than one taxable activity on the same product, for example, manufacturing and selling a product, you still only pay taxes once
• Clean energy: Companies that install clean energy equipment, like solar panels and wind turbines, can apply for a partial refund on sales tax

Filing and payment details

Since there’s no income tax in Washington state, individuals don’t have to file any returns there. They only have to file Form CGT electronically via the Washington DOR website portal if they owe capital gains tax.

Businesses, on the other hand, need to register and file returns for other taxes. The state will assign you one of the following filing schedules:

• Monthly: on the 25th of every month
• Quarterly: on the last day of the month following the end of the quarter
• Annually: on April 15th

Employers register for both UI and PMFL through the Washington State Employment Security Department (ESD). You can report wages and make quarterly contributions via the portal.

Any businesses that hire employees in Washington must also file quarterly tax and wage reports, which are due on:

• April 30th
• July 31st
• October 31st
• January 31st

Note that whenever a deadline falls on a weekend or national holiday, the next business day applies.

What employers and workers should know about Washington income tax

Washington’s lack of income tax simplifies some aspects of payroll, but changes how you manage compliance. Here’s what you need to consider:

• Higher net pay: Washington employees may have more take-home pay than co-workers. Be transparent about why there’s a difference to avoid accusations of unfairness

• State benefits: Ensure payroll teams don’t overlook mandatory state contributions like UI and PMFL. You receive a penalty if payments or reports are late. See also: Understanding Washington Employment and Labor Laws

• Residency rules: Confirm your employees’ residency to understand their income tax obligations. You can ask them to complete an online form asking whether they meet any of the state criteria

• Relocations: Track when employees move between taxable and non-taxable states. You can use a self-service platform like Deel to have them update their addresses and documentation promptly

• Mobile teams: Monitor employees who travel across state lines to check they haven’t established tax residency somewhere besides Washington and incurred tax liabilities

• Employee communication: When hiring or relocating workers, clarify the tax situation in Washington. They may be confused or even nervous about why they don’t pay income taxes

• Payroll automation: Consider using a specialized payroll platform like Deel to manage US wages and mandatory contributions. Our platform automatically tracks each worker’s eligibility across states and applies the current rules and rates

Need more compliance support when hiring in Washington state? Read our Guide to PEO in Washington to learn how a professional employer organization (PEO) can help you manage HR, payroll, and benefits compliantly.

Simplify Washington tax compliance with Deel

Staying updated with Washington’s tax requirements helps you avoid compliance gaps and manage payroll more efficiently. But it’s a lot to undertake on your own.

Deel Payroll - US keeps payroll aligned across all 50 states. It instantly calculates payroll taxes, syncs direct deposits and payslips with your accounting software, and is supported by a team of 350+ in-house payroll and legal experts for guidance on US labor laws, state registration, and more.

Book a call with the Deel team to see how we can support your team in Washington state and beyond.