Washington’s business tax picture shifted again — and Seattle’s B&O rules change on January 1, 2026
Washington employers already carried a large share of state and local taxes in fiscal year (FY) 2024. That FY2024 baseline matters because several policy changes took effect later, including a Washington tax package effective January 1, 2025, and a separate, very practical change for many Seattle filers effective January 1, 2026.
The most concrete 2026 change for day-to-day compliance is in Seattle’s Business & Occupation (B&O) tax. Seattle’s B&O filing can still be required even when liability drops to zero. That “file even if you owe nothing” rule is where many small and mid-sized businesses get surprised.
This article is current as of February 12, 2026, and focuses on tax year 2026 (returns filed in 2027).
1) FY2024 baseline: Washington businesses paid 50.0% of state and local taxes
In FY2024, Washington businesses paid exactly 50.0% of all state and local taxes collected in the state. In this context, “state and local taxes” includes business-paid taxes such as:
- Sales and use taxes (directly paid or embedded in purchasing costs)
- Property taxes on business real estate and equipment
- Washington B&O tax (a state-level gross receipts tax)
- Other business-paid taxes and fees at state and local levels
This “business share” metric is a funding lens. It shows who funds public services in aggregate. It does not prove any one firm’s effective tax rate. It also does not measure profitability.
FY2024 is also a fiscal-year view. Some businesses plan on calendar years. Align periods when you compare trend lines. A FY2024 baseline will not match a calendar-year 2024 income statement.
2) Per-employee tax burden: what it means for hiring, pricing, and budgeting
A statewide total becomes more useful when translated into an employer metric. In FY2024, Washington businesses paid $10,400 per employee in state and local taxes. That ranked Washington 11th highest nationally. It was 20.9% above the U.S. average of $8,600.
Per-employee burden is not a “head tax.” It is a way to normalize many taxes across the workforce. It can vary widely by business model, because tax exposure depends on:
- Labor intensity (more payroll per dollar of receipts can change averages)
- Location (city and county levies differ)
- Property footprint (owned or leased facilities can raise property tax cost)
- Gross receipts exposure (B&O-style taxes rise with revenue, not profit)
National comparisons help with context, but do not tell the whole story. Two states may raise similar dollars using very different tax mixes. One may rely more on sales tax. Another may rely more on gross receipts taxes and local levies.
A practical way to use the metric inside your company is simple:
- Add up state and local taxes your business actually paid for the year.
- Include taxes paid directly and major embedded taxes you can quantify.
- Divide by your average number of employees (or FTEs).
- Compare year over year before comparing to other states.
⚠️ Warning: Gross receipts taxes (like B&O) can rise even in a low-margin year. Budgeting only as a percent of profit can understate cash needs.
3) Why B&O collections grew faster than overall state tax collections
Washington’s state B&O tax is a gross receipts tax. It applies to many businesses based on revenue, often with classifications and rates that vary by activity. Because it is not a net-income tax, it can increase quickly during expansion cycles.
From 2000 to 2024, Washington B&O collections grew 269.5%. Over the same period, total state tax collections grew 190.7%.
Several forces can cause this gap:
- Inflation and economic growth lift receipts over time
- Population growth and consumer demand expand taxable activity
- The state’s sector mix can shift toward high-receipts industries
- Administrative and policy changes can widen or tighten the base
For small and mid-sized firms, the key point is cash flow. A gross receipts tax hits differently than a profit-based tax. A business with thin margins can face the same B&O tax on revenue as a competitor with stronger margins.
Trend awareness matters. If your pricing is locked in by long contracts, B&O growth can compress margins. This can be more acute for contractors, food service, logistics, and other low-margin sectors.
4) Competitiveness rankings: what they measure, and what they miss
Tax structure rankings, like the Tax Foundation’s State Tax Competitiveness Index, look at structure and rules, not only dollars collected. Washington’s overall placement is near the bottom in the 2026 index. Some subcomponents also place near the bottom, while property tax structure scores better.
These indexes commonly consider:
- Rate structures and bases
- Neutrality across industries
- Complexity and compliance friction
- How business taxes interact (sales, corporate, UI, property, etc.)
They may omit, or underweight:
- City-by-city overlays
- Industry-specific incentives
- Port, utility, and special district charges
- Fact patterns like apportionment, nexus, and multistate sales
For site selection, pair any ranking with your own facts:
- Where customers are located
- Where payroll is located
- Where property and inventory sit
- How nexus rules apply to your sales channels
- Which local taxes apply in the specific city
5) Policy timing: FY2024 burden predates 2025 changes, so timing matters
FY2024 data reflects the cost structure before Washington’s 2025 tax package took effect on January 1, 2025. “Effective date” is not just a legal concept. It drives:
- Contract pricing cycles
- Payroll and hiring plans
- Vendor negotiations
- Capital spending schedules
Higher state and local taxes can show up through pass-through channels. Some firms raise prices. Others slow wage growth. Some defer expansion. Startups may reduce burn by cutting headcount.
Avoid single-number forecasting. Scenario plan instead. Model a range of outcomes, then update as city and state guidance becomes clearer.
6) The 2026 law change you can’t ignore: Seattle’s B&O threshold and standard deduction
Seattle changed two core B&O mechanics effective January 1, 2026:
- The B&O tax threshold rises to $2,000,000.
- A new $2,000,000 standard deduction applies for taxpayers above the threshold.
This sounds simple, but the operational impact is mostly about tracking and support files. You need clean revenue categorization, correct sourcing, and a documented threshold test.
Before/After: Seattle B&O (effective January 1, 2026)
| Rule | Before 1/1/2026 | On/after 1/1/2026 |
|---|---|---|
| B&O tax threshold | Lower than $2,000,000 | $2,000,000 |
| Standard deduction for those above threshold | Not a $2,000,000 deduction | $2,000,000 standard deduction |
| Filing requirement | Often still required | Still may be required |
Who is affected most:
- Firms near the threshold that may toggle above or below year to year
- Service firms with large receipts but modest margins
- Multilocation employers that must source receipts into Seattle correctly
Transition rule : For periods beginning before January 1, 2026, apply the old Seattle rules. For periods beginning on or after January 1, 2026, apply the new threshold and deduction. Keep workpapers that show which period you used.
Compliance workflow for 2026:
- Review 2025 revenue now to see if 2026 will cross $2,000,000
- Confirm your Seattle sourcing and apportionment method
- Update accounting categories so Seattle receipts are separable
- Coordinate with payroll and finance for tie-outs and audit support
- Retain worksheets supporting the threshold and deduction math
📅 Deadline Alert: For federal tax year 2026 (filed in 2027), most individuals file Form 1040 or 1040-NR by April 15, 2027. An extension generally moves the filing deadline to October 15, 2027.
Federal issues immigrants and visa holders should not miss
Washington has no state personal income tax, but federal rules still apply. Your U.S. federal filing depends on residency status under Publication 519. Some owners file Form 1040 as resident aliens. Others file Form 1040-NR as nonresident aliens. See IRS guidance at irs.gov/pub/irs-pdf/p519.pdf and irs.gov/individuals/international-taxpayers.
For business filings, common federal forms include:
- Schedule C (sole proprietors on Form 1040)
- Form 1120 (C corporations)
- Form 1120-S (S corporations)
- Form 1065 (partnerships)
If you have foreign financial accounts tied to your business activity, remember FBAR (FinCEN Form 114) is triggered when foreign accounts exceed $10,000 in aggregate at any time during the year. FBAR is due April 15 with an automatic extension to October 15.
A reliable starting page for forms is irs.gov/forms-pubs.
Recommended actions and timeline (tax year 2026, filed in 2027)
- Q1–Q2 2026: Update revenue tracking so Seattle receipts can be tested against $2,000,000.
- By year-end 2026: Keep written support for your Seattle threshold test and any $2,000,000 standard deduction computation.
- Early 2027: Reconcile Seattle revenue sourcing to financial statements before filing.
- By April 15, 2027: File federal returns (Form 1040, 1040-NR, or business entity returns, as applicable). File FBAR if the $10,000 aggregate threshold was met.
- If your ownership or residency status changed in 2026, review Publication 519 and consider professional help for dual-status or treaty positions.
⚠️ Disclaimer: This article is for informational purposes only and does not constitute tax, legal, or financial advice. Tax situations vary based on individual circumstances. Consult a qualified tax professional or CPA for guidance specific to your situation.
