The Complete Guide To Washington State Income Tax & Payroll Taxes
Need to understand Washington State payroll taxes and how they relate to your small business? Read our guide for all you need to know to navigate payroll taxes in the state of Washington.
Washington payroll taxes don’t include state income taxes, as Washington is among the few states that don’t levy an income tax.
However, business owners in Washington state aren’t completely off the hook when it comes to payroll taxes. There are still federal tax and Washington state-level payroll taxes that businesses are responsible for paying or withholding on behalf of their employees. If you’re ready to tackle Washington payroll taxes, we’ve got you covered.
In this guide, you’ll find everything you need to know about payroll taxes in Washington state, including a step-by-step guide to calculating payroll taxes.
Table of Contents
What Is The Washington State Income Tax?
Washington state does not levy an income tax on individuals or businesses.
However, any nonexempt entities engaging in business in Washington state may be responsible for paying business and occupation taxes (B&O) and/or public utility taxes, when applicable. In some cases, businesses may be required to pay one tax but not the other.
Federal & State Payroll Taxes In Washington
Business owners in Washington state must pay and withhold federal and state-level payroll taxes, including FICA taxes, FUTA, state unemployment taxes, B&O taxes, public utility taxes, and more. Understanding which payroll taxes you’re responsible for is the first step to calculating payroll taxes like a pro.
Keep reading for a breakdown of the most common Washington payroll taxes.
Federal Income Tax
Washington employers are responsible for withholding federal income tax from nonexempt employee earnings. The US uses a progressive tax rate with lower income earners taxed at a lower rate than higher income earners.
The 2022 federal income tax rates for single filers are as follows:
- 10% on taxable income of $10,275 or less
- 12% on taxable income over $10,275
- 22% on taxable income over $41,775
- 24% on taxable income over $89,075
- 32% on taxable income over $170,050
- 35% on taxable income over $215,950
- 37% on taxable income over $539,900
Federal income tax rates for married couples filing jointly are as follows:
- 10% on taxable income of $20,550 or less
- 12% on taxable income over $20,550
- 22% on taxable income over $83,550
- 24% on taxable income over $178,150
- 32% on taxable income over $340,100
- 35% on taxable income over $431,900
- 37% on taxable income over $647,850
Washington Business & Occupation Tax
Washington’s B&O tax is a tax on a business’s gross income, sales proceeds, or product value. If your business engages in retail sales, your B&O tax counts as your business’s retail sales tax. As the B&O tax is a gross tax, no deductions are made from the raw receipt value.
Washington’s B&O tax rates are based on your business’s classification. The four most common B&O tax classifications and their tax rates are:
- Retailing: 0.00471
- Wholesaling: 0.00484
- Manufacturing: 0.00484
- Service (and other activities): 0.015
In addition to these most common B&O classifications, there are also 31 specialized B&O tax classifications under which your business may fall, each with tax rates ranging from 0.00138 to 0.0330 of your business’s gross receipts.
Washington Public Utility Tax
Washington state levies a public utility tax on public service businesses. Essentially, if your business provides a public service, you can expect to pay one of the following public utility taxes.
- Water Distribution: 0.05029
- Generation or Distribution of Electrical Power: 0.038734
- Log Transportation: 0.013696
- Telegraph Companies/Natural Gas Distribution/Sewerage Collection: 0.03852
- Urban Transportation and Watercraft (under 65 ft in length): 0.00642
- Railroads/Railroad Car Companies/Motor Transportation/All Other Public Service Businesses: 0.01926
Generally, the public utility tax is paid instead of the B&O tax for those businesses under which the tax applies. Funds from the public utility tax are added to the state’s general fund but may also be used to finance the maintenance of public works facilities.
Social Security Tax
Social security and Medicare taxes were established under the Federal Insurance Contributions Act (FICA), so the two taxes are commonly grouped together and called FICA taxes.
The federal social security tax rate is 12.4%, with contributions split between the employer and the employee. As an employer, you are responsible for withholding 6.2% of your employee’s wages as their contribution to social security taxes. You’re also responsible for paying the other 6.2% out-of-pocket.
Please note that social security taxes operate under a $147,000 wage base, meaning any earnings over $147,000 are not subject to social security taxes.
The current Medicare tax rate is 1.45% for both employers and employees. Employers must withhold 1.45% of employees’ wages and make a 1.45% Medicare tax contribution.
Any individuals earning over $200,000 are subject to an additional 0.09% Medicare tax contribution. The 0.09% Additional Medicare tax is an employee-only contribution, so employers don’t need to pay anything out of pocket to cover the additional tax.
Federal Unemployment Insurance Tax
Washington employers must pay a 6% federal unemployment insurance (FUTA) tax on the first $7,000 paid to an employee each year. If your business expects to owe more than $500 in FUTA taxes, you’ll be required to make at least one quarterly tax payment.
Washington State Unemployment Insurance Taxes
At the state level, Washington employers must also pay state unemployment insurance tax up to the state’s $62,500 taxable wage base.
New employers may be assigned an unemployment insurance tax rate of up to 5.4%, while qualified employers may pay up to 6.02%. Delinquent employers may be assigned a state unemployment insurance tax rate as high as 8.03%.
There are 40 different unemployment insurance tax rate classes that may be assigned to a business based on its former employees’ use of the unemployment insurance fund.
Washington Sales & Use Tax
Washington state’s sales and use tax rate is 6.5% plus any applicable local sales tax rates. Local sales tax rates vary by location, so you can use Washington’s tax rate lookup tool to determine your sales tax liability.
If your business delivers items to customers in-store, the sales tax rate is based on the store’s location. However, if you deliver or ship items elsewhere in the state, the sales tax rate depends on the item’s final destination.
Washington Paid Family & Medical Leave Contributions
Washington employers must withhold and/or make payments toward the state’s Paid Family and Medical Leave premiums.
Employers may opt to cover their employees’ share of the Paid Family and Medical Leave premium contribution. Employers with fewer than 50 employees must withhold 0.6% of an employee’s gross wages up to the $147,000 wage limit.
Employers with 50 or more employees must pay a 26.78% share of the premium and cover the 73.22% employee share through withholding.
Washington WA Cares Fund Contributions
Starting on January 1st, 2023, Washington employers must withhold 0.58% of employees’ gross earnings as contributions to the state’s WA Cares Fund, which provides long-term disability insurance to eligible Washington workers. Employers are not required to pay a share toward WA Cares Fund premiums.
Seattle’s Payroll Expense Tax
Seattle recently implemented a payroll expense tax aimed at large corporations doing business in the city. Businesses must file and pay Seattle’s payroll expense tax if they meet the following conditions for the associated tax year:
- 2021 Tax Year: $7 million and up in total payroll expenses for the 2020 tax year or at least one employee earning $150,000 or more in 2021
- 2022 Tax Year: $7,386,494 and up in total payroll expenses for the 2021 tax year or at least one employee earning $158,282 or more in 2022
- 2023 Tax Year: $8,135,746 and up in total payroll expenses for the 2021 tax year or at least one employee earning $174,337 or more in 2023
Seattle’s 2022 payroll expense tax rates start at 0.7% and increase up to 2.4% based on total payroll expense and annual compensation rates. The tax thresholds for Seattle’s payroll expense tax will be adjusted for inflation each year.
This tax is an employer-only tax, so employers will need to pay this tax out-of-pocket.
For more information about Seattle’s payroll expense tax, visit Seattle’s City Finance payroll expense tax page.
Other Washington Business Taxes
While not payroll or income-specific taxes, there are several other Washington business taxes that businesses should be aware of and consider when creating their business’s overall budget.
In general, Washington levies 45 different taxes depending on the type of business or sales your business is engaged in, from liquor sales to refuse collection.
For a complete list of Washington state’s business taxes, visit the Washington Department of Revenue’s State public utility and other tax classifications page.
Washington Payroll Tax Exclusions & Exemptions
Washington state operates 60+ business tax incentive programs for qualified businesses to take advantage of tax credits, deferrals, exemptions, and reduced rates. Check out the state DOR’s list of tax incentive programs for businesses.
Additionally, most businesses that are classified as tax-exempt organizations at the federal level are exempt from paying taxes at the state level. The IRS classifies charities, religious organizations, churches, private foundations, political organizations, and most non-profits as tax-exempt.
Finally, low-income earners that meet income, filing status, age, and disability status requirements may be exempt from income tax withholding, tax credits, and deductions.
Washington Labor Laws & Other HR Requirements
With even one employee, your responsibilities as an employer increase exponentially. From payday requirements to workers’ compensation policies, employers in Washington have to work hard to remain compliant with the state’s labor laws.
Here’s a breakdown of Washington’s labor laws and HR requirements.
Washington Minimum Wage
The statewide minimum wage in Washington is $14.49 per hour and may be subject to a cost of living adjustment based on the Consumer Price Index. Any minimum wage increases will take effect on January 1st of the following year.
Currently, two localities in the state of Washington have separate minimum wages and labor rules. Seattle’s minimum wage is $17.27 per hour, while the city of SeaTac has a $17.54 hourly minimum wage.
Businesses must pay all tips and service charges to employees and may not use those funds toward employees’ minimum wage.
There are some exceptions to minimum wage laws in the state of Washington, including:
- Minors (aged 14 and 15) and certificated on-the-job learners may be paid no less than 85% of the state minimum wage.
- Certificated workers with disabilities, some apprentices, and workers who are employed in jobs that are exempt from the Minimum Wage Act may be paid less than minimum wage.
Washington Payday Laws
Washington employers must pay employees at least once per month. Employees must be paid regularly on their agreed-upon scheduled paydays.
Employees who have been terminated or have quit must be paid their final paycheck on or before their next regularly scheduled paycheck.
Per diem pay, on-call pay, and show-up pay are not required under state law. However, employees must be paid for all work performed and all hours worked.
Washington Sick Leave Policy
Washington state’s paid sick leave policy requires employers to allow employees to earn at least one hour of sick leave for every 40 hours worked. Employers are also responsible for informing all employees that they are entitled to paid sick leave accrual and time off.
Employees are eligible to begin accruing sick leave as soon as their first day of work. However, employees may not use sick leave until 90-days have passed from their first day of work. If an employee does not use all of their sick leave during the calendar year, employers must roll over up to 40 hours worth of sick leave into the next year.
Finally, employee sick leave can be used to manage the physical or mental illness of the employee or their close family members, domestic violence situations, and any workplace or school closings related to health risks.
Washington State Paid Family & Medical Leave
Nearly all employees are eligible for Washington’s Paid Family and Medical Leave program, provided they have worked at least 820 hours in a qualifying period of either:
- The first four of the last five completed calendar quarters; or
- The last four completed calendar quarters
Washington’s paid leave program covers up to 18 weeks of qualifying medical and family leave, including care for mental health problems, physical health problems, caring for family members, military family leave, and family bonding time.
While Paid Family and Medical Leave provides job protection, employers are not required to retain an employee’s job if:
- The employer has fewer than 50 employees
- The employee has worked for the company for less than a year
- The employee worked less than 1,250 hours in the year before taking the leave
Washington employees may also be eligible for job-protected, unpaid leave under the federal Family and Medical Leave Act (FMLA). This act provides employees with up to 26 work weeks of leave, depending on military service status.
Washington Workers’ Compensation
Employers in Washington are required to carry workers’ compensation insurance for employees and some independent contractors.
Private workers’ compensation is illegal in Washington state, so workers’ compensation coverage must be purchased through the Washington State Department of Labor and Industries. Only those who are qualified self-insurers may have private workers’ compensation insurance coverage.
To learn more about how to apply for workers’ compensation insurance in Washington, check out the state’s step-by-step guide to getting workers’ compensation insurance in Washington.
Washington Disability Insurance
There are no short-term disability insurance requirements in Washington, so employers do not need to carry this type of insurance.
Washington has newly enacted the WA Cares Fund to provide long-term disability insurance to those who need it. Beginning on January 1st, 2023, nearly all workers will make contributions to the WA Cares Fund at a rate of up to $0.58 per $100 earned.
While some groups won’t be required to make contributions to the fund, most employees must make contributions, and self-employed workers have the option to opt in and make contributions.
After 10 years of contributions and at least 500 hours worked per year, Washingtonians will receive lifetime full-benefit access. This is provided there was never a contribution interruption of more than 5 years.
Workers born after 1968 who contributed to the fund for at least a year will receive lifetime partial benefits.
New-Hire Reporting in Washington State
In conjunction with federal laws, Washington employers are required to report all rehired and newly hired employees to the Division of Child Support. New-hire reporting must be done within 20-days of hire.
New hires are considered those who:
- Have never worked for you before
- Have worked with you before, but it’s been at least 60-days since they’ve last worked for you
- Are working for you under a new Federal Employer Identification Number (FEIN)
Please note that if your business employs individuals across multiple states, you may register as a multistate employer to simplify the new-hire reporting process.
For more information about reporting new hires in Washington, check out the Washington State Department of Social and Health Services New Hire Reporting page.
Washington State Child Labor Laws
To hire minor workers, businesses must:
- Earn a minor work permit endorsement on their business license
- Get a completed parent or guardian and school automatization form
- Verify the employee’s age and identity
While minors under the age of 14 are allowed to work outside of the agricultural work sector, they may only work casual jobs, at-home work, volunteer for charitable organizations, and carry newspapers.
In a nutshell, all minors in the workforce are not allowed to:
- Work in the meat processing, roofing, demolition, or excavation industry
- Operate or engage with heavy machinery
- Handle or be exposed to most toxic chemicals
- Work any place strikes, labor disputes, or lockouts are currently happening
Minor workers in Washington are categorized into age groups: 14-15, 15-16, and the 16-17 age groups, respectively.
Each minor age group is subject to various restrictions related to the duties minor workers can perform, the industries they can work in, their wages, and the times they can work.
For a more in-depth list of child labor laws in Washington, visit the Washington State Department of Labor and Industries Youth Employment portal. The site is home to many youth employment resources, from rest break regulations to an exhaustive list of prohibited duties.
Washington State Paid Jury Duty
There are no state laws that require employers to pay jurors for their service. However, depending on the court, jurors may receive payment for their service from the courts.
Equal Opportunity Employment In Washington State
There are several Washington state laws that protect workers from discrimination and other unfair employment practices in the workforce. It is illegal to discriminate against or engage in unfair employment practices because of an individual’s:
- Age (40+)
- Sexual orientation
- Gender identity
- HIV, AIDS, or Hepatitis C status
- National origin
- Race or color
- Physical or mental disabilities
- Trained service animal or guide dog use
- Whistleblower status (health care or state employees)
- Opposition to a discriminatory practice
Washington Meal Breaks
In addition to providing reasonable access to restrooms for all workers, Washington employers are responsible for managing employee rest and meal breaks.
All Washington employees are entitled to a paid rest break of at least 10 minutes for every four hours worked.
Additionally, all workers are entitled to one 30-minute meal break for every five hours worked and two 30-minute meal breaks for shifts longer than 11 hours. Meal breaks may be unpaid so long as the employee has been completely relieved of their work duties for the entire duration of the meal break.
If an employee’s meal break is interrupted and they must return to work, the employee is entitled to be paid for the full half hour as if they had worked the entire time.
How To Calculate Payroll Taxes In Washington
Washington payroll taxes aren’t easy, but they’re worth knowing. Now that you have a good idea of which payroll taxes your business needs to handle, you can get started on calculating payroll taxes. Below, we’ll walk through the process of calculating Washington payroll taxes for small businesses. Let’s dive in.
Step 1: Compile A List Of Washington Payroll Taxes
As there are so many federal and state payroll taxes to calculate, it’s best to start with a complete list of the payroll taxes you’ll be working with. Here’s a quick refresher of the most common Washington state payroll taxes and their rates:
- Federal Income Taxes: Ranging from 10%-30% of taxable income withheld
- FUTA Tax: 6% of the first $7,000 paid to an employee each year paid out-of-pocket
- Washington UI Tax: Up to 8.03% on the first $62,500 paid to an employee each year, paid out-of-pocket
- Social Security Tax: 6.2% withheld and 6.2% paid out-of-pocket up to the $147,000 taxable wage base
- Medicare Tax: 1.45% withholding and 1.45% paid out-of-pocket
- Additional Medicare Tax: Additional 0.09% withheld from taxable employee income over $200,000 earned
- Washington Paid Family and Medical Leave: 0.6% of taxable employee income withheld up to the $147,000 taxable wage base (Businesses with 50+ employees may split this premium 26.78%/73.22%, with the employee paying the higher rate)
- WA Cares Fund Contributions: 0.58% of taxable income withheld up to the taxable wage base
Step 2: Calculate Gross Wages For All Employees
An employee’s gross wages are their earnings before payroll taxes are taken out. Gross wages may be calculated differently depending on whether an employee is paid a salary or on an hourly basis.
Typically, salaried employees earn a set amount throughout the calendar year, regardless of hours worked. Calculating gross wages for salaried employees is as simple as dividing their salary by the number of pay periods per year.
For example, if an employee earns $96,000 annually and is paid twice monthly (24 annual pay periods), they would earn $4,000 per pay period.
Hourly workers may have more variety in their gross earnings because they are paid based on the hours they’ve worked. To calculate an hourly worker’s gross earnings, multiply the number of hours worked by their hourly wage.
For example, an employee earning $32/hour working 80 hours per pay period would earn $2,560 per pay period.
Supplemental earnings, such as tips, commissions, overtime, bonuses, and more, need to be added to employee gross earnings. These earnings are typically subject to tax and must also be reported as income.
Step 3: Make Pre-Tax Deductions
Some payroll deductions must be made to an employee’s gross earnings. Pre-tax earnings include:
- Traditional 401(k) contributions
- Health insurance premiums
- Life insurance premiums
- Disability insurance premiums
- HSA accounts
- Some benefits options
If any of these deductions apply to your employees, be sure to withhold them before calculating payroll taxes and report them, as applicable.
Step 4: Use The Payroll Tax Formula
The payroll tax formula is straightforward:
(Gross Pay) X (Tax Rate Percentage/100)
Using the payroll tax formula is just plugging in the numbers. Let’s calculate the 0.58% WA Cares contribution for our employee earning $4,000 in gross wages per pay period:
($4,000) X (.58/100) = $23.20
In this example, we would simply multiply $4,000 by 0.0058, with the employer needing to withhold $23.20 as this employee’s WA Cares contribution.
You’ll need to use this formula for each of the applicable payroll taxes for each employee. In short, keep your calculator handy because you’ll need to perform multiple calculations per employee.
Step 5: Make Post-Tax Deductions
Now that you’ve calculated your employees’ post-tax earnings, you can make post-tax deductions on their behalf. Post-tax deductions include, but are not limited to, Roth IRA contributions, wage garnishments, tax levies, and union dues.
Step 6: Run Payroll
Once you have calculated payroll tax liabilities and made all deductions, you’re ready to run payroll for your business.
If you are using payroll software, you can automate the process of sending direct deposit payments or check printing. If you’re doing the process by hand, you can simply sign the checks or manually schedule payments.
Step 7: File & Make Payroll Tax Payments
Withholding payroll taxes isn’t the end of the payroll tax journey. Businesses are responsible for filing payroll tax reports and making payments to the appropriate entities.
Federal payroll taxes may be paid using the Electronic Federal Tax Payment System (EFTPS). Otherwise, Washington Businesses can head to the state’s SecureAccess Washington (SAW) portal to report new hires and manage child support payments.
Washington businesses can use the Employer Account Management Services (EAMS) portal to pay unemployment tax liabilities.
Step 8: Consider Payroll Software For Your Business
It may be worth looking into payroll software solutions for your business. While handling payroll and payroll taxes manually may work for micro-businesses, the DIY payroll doesn’t scale well for growing businesses. Further, as the new WA Cares program and payroll tax clearly suggest, payroll taxes are not stagnant. So, in addition to your payroll tax calculations, you’ll need to stay up to date with state payroll laws and changes.
If that sounds like the time-consuming ordeal that it is, it may be time to consider payroll software for your business. Payroll software can take over calculating, filing, and paying your payroll taxes on time. Additionally, things like new-hire reporting, wage garnishments, and keeping up with payroll tax changes in your state are all tasks payroll software can do for your business.
If you’re interested in trialing payroll software for your Washington business, check out our post on the best payroll software. In our guide, you’ll find an in-depth breakdown of the top payroll software solutions on the market, deals, pricing, and features.
Washington Payroll & Other State Resources
Hopefully, this guide has provided a solid foundation to aid your business in handling Washington payroll taxes. While withholding, paying, and reporting payroll taxes can be a bit tedious, they’re necessary for any business that prioritizes tax compliance.
However, payroll taxes are the least of burgeoning business owners’ worries. Just getting started or need funding for your business?
We’ve also got an in-depth guide to Washington’s best small business loans and financing options. This guide takes a deep dive into financing options for small businesses in the Evergreen state, including loans, borrower requirements, and what to look for in a good business financing option.