Washington Contractor Taxes and Licensing Guide

Yes, labor is taxable in Washington. Prime contractors collect retail sales tax from the property owner on the gross contract price, labor and materials included, at the rate for the job site. Contractors also pay business and occupation (B&O) tax on gross receipts. Washington has no personal income tax, and workers' comp comes from the state, not private insurers.

Is contractor labor taxable in Washington?

For most construction, yes. The Department of Revenue (DOR) says "prime contractors must collect retail sales tax from the landowner on the gross contract price." Costs aren't deducted, and tax is figured before retainage is held back. So the customer's invoice carries sales tax on labor, materials and any subcontracted work together. That's the opposite of states like California or Oregon, where the labor on a real property job isn't taxed.

The rate is set by the job site, not your shop. DOR says "retail construction services are sourced to the location where the construction takes place." A Tacoma contractor doing a remodel in Seattle charges Seattle's combined rate. DOR's Tax Rate Lookup Tool gives the rate and location code for any address.

Some work follows different rules, including public road projects and contracts with the federal government. Speculative builders who build on land they own are treated differently from contractors building for a landowner. If you do any of that, read DOR's construction industry guide or ask a CPA. Our labor vs. materials guide compares Washington with other states.

How do materials, reseller permits and use tax work?

Materials that become part of the finished project are purchased for resale, so you give suppliers your reseller permit and don't pay tax at the counter. DOR is blunt about the limit: "A contractor may not use a reseller permit to purchase items which are consumed in performing construction." Equipment, tools, supplies and equipment rentals are taxable to you, even if you pass the cost to the customer.

• Use tax. "Use tax is due if sales tax has not been paid on items the contractor uses as a consumer." That covers an online tool order from a seller that didn't charge Washington tax. See use tax for contractors.
• Supplies shipped to the job. Tax is paid based on the job site location.
• Misuse penalty. Buying consumables on a reseller permit draws a penalty of 50% of the tax due on the item.
• Records. Reseller permits for construction are valid for two years, and permits you accept from others must be kept for five years.

What is Washington's B&O tax and how much is it?

The business and occupation (B&O) tax is Washington's main business tax, and it's charged whether or not you made money. DOR says it's calculated on the total income the business earns, and "businesses cannot deduct expenses such as labor, materials, taxes, or other costs of doing business." Prime contracting income is taxed under the Retailing classification.

Washington has no personal income tax, so you won't file a state return on your profit the way you would in Idaho or Oregon. Federal tax still applies. Set money aside for federal quarterly payments with the quarterly estimated tax calculator, and budget B&O and sales tax as separate line items because they come out of gross receipts.

Which licenses do contractors need in Washington?

Washington runs contractor registration rather than a trade-exam license for general and specialty contractors. You register with the Department of Labor & Industries (L&I) by posting a bond and proving liability insurance. Electrical and plumbing work need their own L&I credentials on top of that. Our contractor license guide explains how registration differs from licensing.

Do I need workers' comp in Washington?

If you have employees, almost certainly. Washington is a monopolistic state: L&I says Washington "does not allow private workers' compensation coverage," so you buy it from L&I's State Fund or become a certified self-insured employer. You can't shop the policy to a private carrier the way contractors in Idaho or California can. Reciprocal agreements let some out-of-state workers come in temporarily, but L&I says the Montana and Nevada agreements exclude construction work. See workers' compensation for how premiums are figured.

Local taxes and other things to check

• Local sales tax. Cities and counties add to the 6.5% state rate, and DOR updates rates quarterly. Always use the job site's location code on your return.
• City B&O and business licenses. Some cities may levy their own B&O tax or require a city business license. Check with each city where you work.
• Lien rights. Washington has its own notice rules for mechanics liens; read the statute before a job, not after a missed payment.
• Neighbors. Working across the river? Oregon has no sales tax, and Idaho has its own contractor rules.