LLC vs S-Corp in Washington

Washington has no personal state income tax and no state corporate income tax, which changes the LLC vs S-corp math for a trade business. Washington does impose a Business & Occupation (B&O) tax on gross receipts that applies regardless of entity choice, so the LLC vs S-corp decision in Washington is driven by federal tax, not state tax. The Washington Secretary of State handles the entity filing. The IRS handles the tax classification via Form 8832 and Form 2553. A Washington LLC can elect to be taxed as an S corporation. Washington LLC basics. - Certificate of Formation filed with the Washington Secretary of State under RCW 25.15. Filing is done through the Corporations and Charities Filing System (CCFS). - Annual report required with the Secretary of State each year. Confirm the current filing fee and online vs paper fee schedule on the Secretary of State fees page before filing, as fees are periodically adjusted. - Every Washington business with gross income at or above the Department of Revenue registration thresholds must also obtain a Washington business license through the Business Licensing Service, which issues the Unified Business Identifier (UBI). DOR lists registration triggers including $12,000 or more in annual gross income, hiring employees within 90 days, or collecting sales tax. - Single-member LLCs default to disregarded entity for federal tax. Multi-member LLCs default to partnership tax. Either can elect S corp treatment with Form 2553. Washington S corp basics. - Washington does not impose a corporate income tax, so an S corp election does not change state income tax exposure. There is no state income tax to begin with. - B&O tax is unaffected by entity type. B&O is a tax on gross receipts, applied by classification (retailing, wholesaling, services and other activities, construction). An LLC, S corp, and C corp doing the same construction work face the same B&O rate on the same gross revenue. Confirm the current rate for your classification on the DOR B&O rates page. - Payroll. An S corp must pay its owner-employee a reasonable W-2 salary. Washington employers pay state unemployment insurance to the Employment Security Department and workers' compensation premiums to L&I. Those obligations apply to any employer, including an LLC with employees, not just to S corps. Why a Washington trades shop might still elect S corp. The main reason in Washington is federal self-employment tax savings. A disregarded-entity LLC owner pays self-employment tax on the full net profit. An S corp owner-employee pays payroll tax on wages only; the distribution portion avoids self-employment tax. Washington's lack of state income tax does not change this federal calculation, and the B&O tax is owed either way. Rule of thumb. Start as a Washington LLC. When annual profit after a reasonable owner wage is high enough that payroll tax savings clear the payroll, retirement plan, and accounting costs, elect S corp. A CPA with Washington construction clients can run the breakeven for your numbers and confirm the current Secretary of State annual report fees, B&O classifications and rates, and DOR thresholds.