Many businesses are surprised to learn that while Washington businesses don’t have to pay state income tax, you still have to pay B&O tax. Recent changes to this tax have caused massive confusion. We work with Washington businesses every day, and hear all of your questions. So let’s clear things up.
In this article, we explain:
- What is the B&O tax in Washington State?
- Which Washington businesses have to pay B&O tax?
- What is the Washington B&O tax threshold?
- What are Washington B&O tax rates?
- State B&O taxes vs. city B&O taxes
- What changed in 2025 and 2026, and what’s ahead?
- Common B&O tax filing mistakes
What Is the Washington State B&O Tax?
What is Washington State B&O tax? This is a business and occupation tax based on your organization’s gross income, not net income. This particular tax provides ZERO deductions for labor, rent, materials, or other operating costs.
This is a unique law you only encounter in Washington State. Most states tax corporate profit. But Washington State taxes your top-line revenue. Even if you lose money one year, you still owe B&O tax on your gross receipts.
B&O taxes exist because Washington has no state income tax. So while the state doesn’t tax employee paychecks, it finds other ways to tax you, including Washington capital gains taxes, Washington sales taxes, and Washington B&O taxes on your gross receipts.
Note: This article covers Washington State B&O tax. Many cities in Washington, including Seattle, Tacoma, Bellevue, Bellingham, and others impose a separate city-level B&O tax that you file and pay in addition to Washington State B&O tax.
Who Has to Pay Washington B&O Tax?
Who is subject to Washington B&O tax? You are, if you have a business in Washington State. Every business in the state is subject to Washington’s B&O tax, even if you take a loss.
B&O taxes apply to nearly everyone doing business in the state of Washington, even if you are based in another state. That includes LLCs, sole proprietors, corporations, partnerships, and nonprofits engaged in business activity.
Washington's B&O tax nexus threshold is $100,000 in gross receipts sourced or attributed to the state of Washington during the current or prior calendar year. Once you cross this threshold, you must register and file, even if you have no physical presence in the state.
This can come as a surprise to out-of-state sellers, remote service providers, SaaS companies with Washington customers, and even e-commerce stores that ship products to customers in Washington. All of this is considered Washington State business, and completely taxable if you meet Washington’s B&O tax threshold.
Exceptions: If you operate a small business in Washington State, you may be eligible for the SBC (Small Business Credit). To determine your tax liability, review Washington’s Small Business B&O Tax Credit (SBC) table. If you qualify for this credit, it could reduce or even eliminate any Business and Occupation tax you owe.
The SBC phases out as your gross income grows, and you have to file a B&O tax return to calculate the amount of the credit. If you use My DOR to file electronically, the amount of your potential tax credit automatically populates on the form.
What Does NOT Trigger Washington’s B&O Tax? You can deduct pure investment income from your gross receipts under the law’s Safe Harbor provision, but only if it’s “incidental” income, meaning it makes up less than 5% of your annual gross receipts.
Washington B&O Tax Rates by Classification
Washington B&O tax rates are based on what your business does, not how you're structured. A Washington LLC and Washington S-corp doing the same kind of work will pay the same B&O tax rate. Your classification is what matters.
Washington B&O Tax Rates by Classification for 2025, 2026 and 2027
One of the biggest changes to Washington B&O tax rates in 2025 was the introduction of a progressive tax based on gross income. This applies to your business if you operate under the Service and Other Activities classification.
Prior to October 1, 2025, Service and Other Activities were taxed at a flat rate of 1.5%. As of October 1, 2025, there are 3 tax rates for this classification. You could pay as much as 2.1% now, depending on how much you make in taxable income.
If you engage in more than one type of business activity, you may need more than one Washington B&O tax classification.
Example: You own a bakery. Part of your business involves selling wholesale goods to coffee shops. In this scenario, you have business activity under two separate B&O tax classifications — both retailing and wholesaling. You’re responsible for knowing which rate you have to pay for each classification.
But it’s not all bad news. The state of Washington does allow you to take the Multiple Activities Tax Credit (MATC). If your business performs more than one taxable activity for the same product, you may be able to take an MATC to avoid paying taxes twice on the same amount.
What Changed in 2025 and 2026 and What’s to Come
Washington State B&O taxes increased in 2025 for many businesses, not just the ones in the Services and Other Activities classification.
Here’s a comprehensive list of the B&O tax changes made in 2025. Some took effect already, and some arrive in 2027.
- Effective Oct 1, 2025: Previously a flat tax, the Service and Other Activities classification became tiered at 1.5%, 1.75%, or 2.1%, depending on your income bracket.
- Effective Oct 1, 2025: The surcharge for financial institutions increased from 1.2% to 1.5% (This increase applies to $1B+ consolidated groups only).
- Effective Jan 1, 2026: Washington State instituted a new 0.5% surcharge on any business with taxable income over $250M that could be sourced or attributed to the state (in effect through 2029).
- Effective Jan 1, 2026: The advanced computing surcharge jumped from 1.22% to 7.5%, and the maximum surcharge cap went from $9M to $75M.
- Effective Jan 1, 2026: Several B&O preferential rates for international investment management firms, prescription drug resellers, insurance producers, title insurance agents, and surplus line brokers were eliminated.
- Effective Jan 1, 2026: The state established a new B&O classification for payment card processing at a tax rate of 3.1%.
- Effective Jan 1, 2027: Standard retailing, wholesaling, manufacturing, and extracting rates will go up from 0.471% or 0.484% to 0.5%.
Most of the B&O tax rate increases target very large businesses. But the new tiered service rate change could affect any business in Washington’s service industry with over $1 million in gross income.
Washington Small Business B&O Tax Credit Table: Could You Owe ZERO?
Washington’s Small Business B&O Tax Credit (SBC) table displays the tax liability for small businesses in the state of Washington. If you qualify for this credit, it could reduce or even eliminate your B&O tax bill completely.
The SBC phases out as your gross receipts go up. Once you exceed a certain amount, the amount of your tax credit goes to zero. The amount of credit you could receive is based on both your filing frequency (monthly, quarterly, or annual) and your business classification.
Keep in mind that even if the small business B&O tax credit wipes out your tax liability, you usually still have to file the return in order to claim the credit. If you file electronically through My DOR, the Washington State official online portal, the state calculates the amount of your tax credit automatically for you.
Don’t make this mistake: File your B&O taxes on time, even if you don’t think you owe any B&O taxes. The only way to know for sure is by filing with the state of Washington. The penalty for skipping returns or filing late tax returns triggers escalating penalties of 9-29% under RCW 82.32.090. It’s definitely worth taking the time to file, just in case.
Washington B&O Tax Return Filing Instructions
Washington B&O tax filing is easy if you use the state’s official online portal, My DOR. It automatically calculates the Small Business Credit (SBC) for you, and you don’t have to deal with the hassle of paper forms.
How often do you have to file B&O taxes? The state of Washington determines your filing frequency based on your expected gross income for your business. Most small businesses file quarterly. Very small businesses file annually, and larger businesses file monthly.
When are B&O taxes due? B&O taxes are due on the last day of the month following the reporting period.
Example: If you file quarterly, your return would be due the last day of the month following the end of the quarter. April 30th would be your 1st B&O filing deadline of the year if you file quarterly.
Annual filers need to file a state B&O tax return by April 15th each year.
What you need to file your return:
- Your total gross receipts by business classification
- Any deductions or exemptions you plan to take
- Any tax credits you're claiming
Note: City B&O taxes are filed separately. If you do business in Seattle, Tacoma, Bellevue, Bellingham, or another city with its own B&O city tax, you will need to file a second return.
You can file local city B&O tax returns using the FileLocal online portal or by submitting a paper city tax return to your local city office.
Common B&O Tax Mistakes Small Business Owners Make
Washington B&O taxes can be very confusing for small businesses trying to navigate the changes.
These are the most common B&O tax mistakes we see:
- Filing under the wrong classification. Businesses that do both selling and installing often misclassify under one classification or the other instead of splitting between retailing/wholesaling and service.
- Missing the MATC. If you’re a manufacturer who also sells your own goods at retail, you could be at risk of double taxation. Taking the Multiple Activities Tax Credit could help you avoid paying B&O taxes twice on the same product.
- Forgetting about city B&O. We see this often with Seattle businesses. The 2026 Seattle B&O tax increase from $100K to $2M doesn't apply to your Washington State B&O taxes, and vice versa. Both city and state B&O tax thresholds are always subject to change. You have to keep track of both if you do business in a city with its own B&O tax laws.
- Out-of-state sellers missing nexus. SaaS and e-commerce businesses often cross the $100K Washington B&O gross receipts threshold without realizing it.
- Treating B&O as a "set and forget" line on the bookkeeping spreadsheet. When classifications change, or service revenue tips above $1M into the new tiered rate, your bookkeeping setup needs to change, too. Not keeping track of changes in the tax law could lead to costly penalties.
Washington State B&O Taxes Frequently Asked Questions
Is Washington B&O tax the same as sales tax? No. Sales tax is collected from customers at the point of sale, and passed through to the state. Your business pays B&O tax based on your gross receipts. Most Washington businesses owe both Washington State B&O tax and sales tax. And if you do business in a city with its own B&O tax, you could be required to pay city B&O tax as well.
Do I owe Washington B&O tax if my business lost money this year? You may still owe B&O tax if you meet Washington's B&O tax nexus threshold of $100,000 in gross receipts during either the current or prior calendar year.
Washington B&O tax is based on gross receipts, not profit. A business with $400,000 in revenue and $500,000 in expenses still owes B&O on the $400,000 (subject to the Small Business Credit).
What is the Washington B&O tax rate for services? As of October 1, 2025, the Service and Other Activities classification uses a tiered rate: 1.5% on gross income under $1M, 1.75% from $1M to $5M, and 2.1% above $5M.
Do remote sellers owe Washington B&O tax? Yes, if you cross Washington’s B&O tax nexus threshold of $100,000 in gross Washington receipts during the current or prior calendar year. This applies even if your business doesn’t maintain any physical presence in the state.
Is the Seattle B&O tax the same as the state B&O tax? No. The Seattle B&O tax is an additional tax payable to the city of Seattle in addition to your Washington State B&O tax. Seattle, Tacoma, Bellevue, Bellingham, and several other Washington cities impose their own B&O taxes, with their own rates, thresholds, and returns.
Can my LLC deduct expenses from B&O tax? Generally, no. There is no deduction for labor, rent, materials, or most operating costs. A limited number of statutory deductions apply (interstate sales, bad debts, and certain pass-through income,) but most small businesses don't qualify for them.
Get Your Washington B&O Taxes Setup Right
Washington B&O taxes are quite unique. Washington is the only state that requires them, and you can owe B&O taxes even for years when you take a loss. The business classifications can be confusing to understand. We've seen the confusion, and we’ve helped small businesses streamline their B&O tax filing process in Bellingham, Burlington, and Friday Harbor since 1995.
If your classification feels uncertain, or you haven’t updated your process to reflect the 2025 B&O tax changes, a quick 30-minute review could help you find potential tax savings or identify any compliance gaps you might be unaware of.
Talk to a Washington CPA about Your B&O Tax Filing Setup
*** This article provides general information about Washington's B&O tax, and is not a substitute for tax advice tailored to your business. Consult a licensed CPA before making any tax filing decisions.