You know your business needs to hire employees, and you’re already on board with using a full-service payroll provider such as Gusto, Intuit Full-Service Payroll, ADP, or Paychex. Your accountant said it would be “easy” and that the payroll service would “take care of everything for you.”
But now you’re looking at the software setup and it’s asking you for not only a federal EIN, but a Washington UBI, ES reference number, worker’s comp ID, letter ID, or maybe even a PAC code? And what on earth is Washington EAF, anyway?
In this longer-than-usual article, we’re going to try and guide you through this stuff. And don’t worry, once you get your full-service payroll product set up, it really is easier—really.
First: Washington State’s Tax System in a Nutshell
The easiest place to start is with a brief overview of how Washington state’s tax system works, and which agencies manage which parts.
One type of payroll tax in Washington State is state unemployment insurance premiums. These premiums fund our state’s unemployment benefits program. The Washington Employment Security Department runs this program, and thus, this agency is where employers file reports and pay unemployment insurance.
Another type of payroll tax in Washington State is worker’s compensation insurance premiums. These premiums fund our state’s worker’s compensation insurance program. The Washington Department of Labor and Industries runs this program, and thus, this agency is where employers file reports and pay worker’s comp premiums.
Currently, state unemployment (WA SUI) and worker’s compensation (WA L&I) are the only two types of state-level employment taxes in Washington State. However, there are some other, non-payroll related taxes in Washington State that are helpful to know about as you’re trying to sort through all of this stuff as a small business owner.
For example, while Washington State doesn’t have an income tax, it does levy a “B&O tax” on business’ gross receipts. In addition, Washington charges both sales tax and use tax to consumers who either purchase or use taxable goods in Washington State. These (plus a handful of other excise taxes) are collected from businesses by the Washington Department of Revenue. So, Washington State employers have three different state-level agencies to keep track of when filing and paying taxes.
Finally, note that there’s a new type of employment insurance on the horizon for Washington employers: family and medical leave insurance. We’ll discuss this issue a bit more at the end of this article, but for now, just remember that this will be another tax you’ll need to keep track of starting in 2019.
How to Set Up Your State-level Tax Accounts
You can set up the state-level tax accounts required to “do” payroll by taking three steps. The next few paragraphs describe and discuss these steps.
Step 1: Make Sure You Have a Washington Business License
Here’s the first key thing to know about running a business in Washington State: if your company does business in Washington, then you likely need a Washington business license. It will be difficult for you to open a business bank account in Washington State if you don’t have one.
If you’re unsure whether or not your business already has a Washington State business license, you can check if that’s the case online; just use the Washington DOR’s business license search tool. You use this tool by going to the Washington DOR’s homepage, then in the box labelled “I want to…”, click the link that says “Look up a business” (see Figure 1, below). If you search for your business’ name on the WA DOR’s website and it doesn’t show up, don’t panic; this search tool is very finicky about punctuation, so it might be that the name you searched for is off by a period or a comma.
One very useful thing about this search tool is it will tell you not only whether or not your business is licensed in Washington State, but also what address the Washington DOR has on file for your business. That information is going to be very helpful if it turns out you’ve lost the letter ID that you need to add an existing business license to a new MyDOR account.
Should I Set Up a MyDOR Account?
It’s a good idea for any Washington small business owner to set up a MyDOR account and then link all of their businesses to that account. Even if you outsource managing your business license and excise tax filings to a professional, you’ll still get visibility into what’s going on with your business, and who knows; you might even save some money if you realize you can do a lot of this stuff yourself.
How Do I Add an Existing Business to a New MyDOR Account?
We referred to this briefly earlier, but it’s worth bringing up again: if you need to add an existing business to a new MyDOR account, the Washington DOR will ask you for a “letter ID” (it used to be called a “private access code”, or PAC) as a way of verifying your identity before they give you access to the business’ information. If you don’t know your letter ID, the way to access it is to send a request to the Washington DOR asking them to mail a letter with the ID on it to the address they have on file for your business. That letter will look like this.
You can figure out what address the Washington DOR has on file for your business using the business license search tool we described earlier. If the address in the Washington DOR’s system is out of date, then you’ll probably need to call the DOR and have someone who works there help you get a hold of your letter ID. As of this writing the number to call is 1 (800) 647-7706.
Other Useful Information About Washington State Business Licenses
As we wrap up our discussion of Washington business licenses, here’s one good thing to know: Filing a business license application is how many businesses obtain a “unified business identifier,” or UBI number. However, legal entities such as LLCs and corporations obtain a UBI when they file documents with the Washington Secretary of State.
This brings us neatly to an important final point. If your business is set up as a legal entity separate from yourself (such as an LLC or a corporation), then you apply for this business license after you set up/register your legal entity with the Washington Secretary of State’s office. If your business isn’t set up as a special legal entity, then you would just file for a business license application as a sole proprietor or general partnership. And if any of the stuff we described in this paragraph was confusing (say, you’re not sure if you’re an LLC, or not sure if you should be an LLC), you probably want to find some time to sit down with a good attorney and ask them some questions about how this stuff works and what’s right for your business.
Step 2: Make Sure Your Business License Says You Plan to Hire Employees
Okay, hopefully after reading our last section you were able to set up a MyDOR account and link your existing business license to that account (maybe after some waiting for a letter ID to come in the mail). Or perhaps you’ve set up a MyDOR account for a brand-new business that’s about to start hiring employees right away, and you’re ready to file that initial business license application. Now what?
Well, here’s the second key thing to know about running a business in Washington State: in general, if a business has employees, it needs to check a box on its Washington business license application that says it has employees. That’s how a business opens accounts with the Washington ESD and Washington Department of L&I.
If you’re not sure whether or not this box has been checked on your business license, one way you can find out is by searching for the business using the Department of L&I’s contractor search tool, available here. This tool mainly exists for people who hire contractors and want to check and make sure the contractor has worker’s compensation insurance, but any type of business with workers should appear in the search. (You can find our CPA firm in there, for example, if you search the UBI 602-451-442.)
If you need to update your Washington business license to indicate that the business has employees, you do so in MyDOR. And confusingly, even though your business license already exists, the way you update an existing license is by clicking the link in the upper-right corner, “File New Business License Application” (see Figure 2). Then on the next screen, under “Purpose of Application,” you’d select “hire employees” (see Figure 3).
If you think your business license is already up to date, and you just need to know what your state unemployment account numbers are, then your best bet is to call the Washington ESD and ask them to help you get the account numbers you need. As of this writing the phone number for that is 1 (855) 829-9243.
(Your workers’ comp number should be available using the Department of L&I’s search tool we linked to above, and you should already have your letter ID/PAC from when you got your business set up in MyDOR, earlier.)
Step 3: Set up Payroll-specific Agency Accounts
Even if you’re going to outsource payroll to a full-service payroll provider (and we really recommend that most small businesses do), it can make things easier in the long run to set up your own online accounts with the Washington ESD and Washington Dept. of L&I. Like we said above when we talked about setting up a MyDOR account, it’s really valuable to have that visibility and just make sure that as the owner of your small business, these agencies recognize that you’re authorized to manage and discuss your business with them.
Remember, as we explained above: the way employers open accounts with the Washington ESD and Washington Dept. of L&I is by checking a box on their business license application saying that the business will hire employees. So, after filing a business license with the appropriate box checked, you’ll receive two important letters in the mail.
One letter is from the Washington ESD, and it will provide you with your ESD account information. Specifically, the letter will include your business’ account number, state unemployment insurance (SUI) tax rate, and employment administrative fund (EAF) tax rate. It will also include instructions for how you can manage your WA ESD account online using the department’s portal, called Employer Account Management Services, or EAMS.
The second letter is from the WA Department of L&I, and it will provide you with your L&I account information. Specifically, the letter will include your business’ account number, risk classification, total hourly rate, and permissible employee withholding rate. It will also include instructions for how you can manage your WA Department of L&I account online using the department’s portal, called My L&I.
Note that both EAMS and My L&I use the SecureAccess Washington system for logging in, same as MyDOR. So even though you need to maintain three separate online accounts to manage your Washington small business, at the very least you only need to remember one username and password.
One Final Tip on Setting Up State-level Payroll Accounts
Here’s one final tip about setting up these state-level accounts that’s borne from experience. Agencies like the WA ESD are very particular about only disclosing account information to authorized persons (as they should be). For example, they often won’t let someone make changes to an LLC’s account information unless that person is listed as a “governing person” in their records. This can be a little bit of a headache to deal with if you haven’t always been on top of maintaining your records with state government agencies, but it’s a solvable problem.
If an employee of your business isn’t yet authorized to talk to the ESD about the business’ account, here’s what you’ll need to do. First, make sure that you’ve provided the Washington Secretary of State with up-to-date information about who the business’ “governing persons” are, assuming the business is a corporation or an LLC. You can update that information by creating an account through the new Corporations and Charities filing system, then using that account to file an amended annual report that explains who the current governing persons are.
Once your information with the Washington Secretary of State is up to date, you’ll need to file a Form 5208-C-2 with the Washington ESD to notify the department that there’s been a change in the corporate officers or LLC “officers.” The phrasing on the form is kind of awkward for any situation where an LLC isn’t a member-managed LLC, but that’s ESD’s system.
Once the ESD has a Form 5208-C-2 from you, they should be willing to talk to a corporate officer or LLC manager and help them figure out your account information.
Outside Payroll Service Setup Checklist
Here’s a checklist you can use to help yourself track down all of the information your full-service payroll provider will need from you:
- Articles of incorporation/articles of organization filed, if business is to be a corporation or an LLC. Be sure the Secretary of State’s office has correct and up-to-date information on corporate officers/LLC managers (“governing persons”).
- Federal EIN obtained from the IRS
- Washington business license indicates business has employees
- Washington UBI obtained
- Washington letter ID/PAC obtained
- Washington ESD account number (“ES Reference Number”) obtained
- SUI tax rate obtained
- EAF tax rate obtained
- Washington L&I account number (“Workers’ Comp Account ID”) obtained
- Worker’s comp risk classification, total hourly rate, and permissible withholding rate obtained
- Business checking account set up in business’ name, not business owner’s name. Have online banking set up and ready. Also, be sure you have both the routing number and the account number ready.
Once you’ve gathered all of this information, setting up payroll the rest of the way should be rather straightforward. And once it’s all set up, your payroll provider should be able to take care of everything else (with the possible exception of Washington worker’s comp, as we explain below).
Check if Your Employees Are Exempt
Some employees’ wages are exempt from state-level payroll taxes, so you’ll want to check the rules on this stuff and make sure you’re not paying more in tax than you should.
Washington State Unemployment Exemptions
A wide variety of employees are exempt from state unemployment insurance. For example, per RCW 50.04.165, corporate officers are exempt from unemployment coverage, and per WAC 192-300-190, so are a business’ owners (such as LLC members, sole proprietors, or partners in a partnership). The Washington ESD has an FAQ page on the corporate officer exemption available here.
Washington Worker’s Comp Insurance Exemptions
Whether or not an employee is exempt from Washington workers’ compensation insurance is slightly nuanced. The rule comes from RCW 51.12.020 and says that, among other exceptions, a business doesn’t have to pay for workers’ compensation insurance for:
- Sole proprietors
- Corporate officers
- Limited liability company members who are also managers
The really important thing to note about these terms like “partner” or “corporation” is that this is a Washington State law, not a federal law, which can be confusing. If your LLC is taxed as a corporation (such as an S corporation) under federal law, and thus you think of yourself as a “corporate officer,” that doesn’t mean that you get to consider yourself a corporate officer under this state-level law. In the eyes of Washington State, you’re not a corporation, you’re an LLC, and by definition only corporations can have corporate officers. As an LLC, you only get to exclude member-managers.
Some Other Important Payroll-Related Stuff to Know
There is a lot to know about labor laws, and you really should consult a professional expert if you need help with compliance. But we’re going to take this last part of the article to briefly touch on a number of issues that you want to, at the very least, have a passing familiarity with as an employer.
Full-service payroll often doesn’t include Washington worker’s comp
Here’s a really important thing to know about full-service payroll products in Washington State. They usually don’t deal with Washington workers’ comp. Small businesses often expect it because full-service payroll providers say they’ll “deal with all the taxes.” And in Washington State, L&I insurance feels like just another tax. But in most states, workers’ comp is mandatory insurance purchased through a private insurer. Because of this, many payroll providers don’t consider it a standard part of the “full-service payroll” package.
For example, as of this writing, Intuit Full-Service Payroll doesn’t include Washington workers’ comp. Intuit has an add-on product in addition to their full-service payroll product that’s essentially an integrated online brokerage service for private workers’ comp insurance products. But they don’t have an automated workers’ compensation solution for Washington State businesses. Gusto, on the other hand, does file Washington workers’ comp, in addition to integrating with private brokerage services for the states that mandate purchasing private workers’ comp insurance.
The lesson in all this is that when researching full-service payroll vendors, you want to really dig in to the Washington workers’ comp question and get a clear answer from the sales rep about whether or not they’ll take care of it for you.
New hire reporting and child support remittance
In Washington State, whenever a business hires a new employee it has to report the hire to the Washington Division of Child Support. This requirement exists to check if the new employee is behind on paying their child support.
Your full-service payroll software might file these reports for you, but it’s good to check. If they don’t take care of the new hire reporting you can file these reports online yourself here.
Labor law posters
Employers are required to have certain labor law posters displayed in a location where all employees will clearly see it.
Luckily, figuring out which labor law posters a business is required to display is actually pretty easy. For federal-level requirements, you can use the U.S. Department of Labor’s Post Advisor tool, available here. For Washington State requirements, you can consult this webpage on required ESD posters and this webpage on required L&I posters.
Collecting W-4s and I-9s
Whenever you hire a new employee, you’ll need to make sure you provide them not just a W-4 (to calculate their federal income tax withholding), but also an I-9 (to verify that they’re authorized to work in the U.S.) If you have detailed questions about I-9 requirements, that’s probably a conversation for a labor and/or immigration law attorney (all we can really say as tax accountants is that it’s an issue to be aware of).
Minimum wage laws
Federal minimum wage and overtime laws are in the Fair Labor Standards Act. This law establishes a minimum wage, overtime laws, child labor laws, and recordkeeping requirements. The federal minimum wage, $7.25 an hour, is significantly lower than Washington State’s minimum wage.
However, certain types of employees (commonly referred to as “exempt employees”) are exempt from the protections of the FLSA. The most notable and common exemption is probably the white-collar worker exemption.
At the state level, note that Initiative 1433 was approved by Washington State voters in 2016. Among other things, it increased the state’s minimum wage rate over a number of years (RCW 49.46.020). And some localities in Washington State have passed their own minimum wage laws. In Seattle, for example, the minimum wage is generally $15 per hour. The cities of Tacoma and SeaTac also have a minimum wage higher than the state minimum wage.
We might sound like a broken record at this point, but if you have any questions about minimum wage laws, that’s really a conversation for a labor law attorney.
Maximum pay periods
Washington State has rules on how frequently you need to pay your employees. As a general rule, an employer needs to establish a regular payday for both regular wages and overtime pay and it can’t pay its employees any less frequently than monthly (WAC 296-126-023 and WAC 296-128-035).
This is why you’ll often notice that payroll software won’t let you choose a longer than monthly pay period by default; to a certain extent, they’re trying to save small business owners from themselves by forcing the user of the software into a compliant pay period.
If your business is something like a restaurant or hotel, where employees customarily receive tips, know that there are special accounting rules for how to treat these tips. For instance, the IRS is concerned about making sure employees pay income and payroll tax on their tips (see IRS Publication 531). And state and local law is often concerned about making sure employees’ tips aren’t pocketed by the employer.
For example, Washington State law is stricter than federal law when it comes to minimum wage and tips. State law says very clearly that tips aren’t part of minimum wage, and they must go to employees, not the employer: see RCW 49.46.020, RCW 49.46.160, and WAC 296-126-022.
Family and Medical Leave
At the federal level, the Family Medical Leave Act is a federal law that requires employers to provide employees with up to twelve work weeks of unpaid leave and continued group health insurance coverage if the employee has a family or medical emergency.
At the state level, Washington State has a number of different leave laws that are stricter than federal laws. For example, Washington State has a domestic violence leave law (RCW 49.76) and a mandatory paid sick leave law (Initiative 1433).
Note, too, that not long after Initiative 1433 passed, the Washington State legislature created a new public insurance program for paid family and medical leave (RCW 50A.04). This is a different law than the paid sick leave law created by the initiative. More information about the upcoming program is available here.
Employee vs. independent contractor
Sometimes small business owners will set up a business and then not run real payroll or file payroll tax returns throughout the year. Then, after the fact, the business owner wants to deal with it by just calling everyone who works for the business an “independent contractor.”
This trick doesn’t work. State governments, and the federal government, have rules for when a worker can and can’t be classified as an independent contractor.
Generally, a business must determine whether or not a worker is an employee by looking at the common law on this issue. This is a facts and circumstances determination that’s based on the following:
You won’t get an explanation from the IRS or anyone else that will clearly and unambiguously explain for your particular situation which workers are employees and which aren’t. That’s the nature of “facts and circumstances”-type laws. That being said, most of the time cases aren’t borderline, and it’s usually pretty clear whether you’ve hired someone or purchased services from an independent business.
If you want to set up a pension plan for employees, know that those plans are regulated by the Employee Retirement Income Security Act (ERISA). Because of this, you really don’t want to go the DIY route with setting up a retirement plan. Instead, if you want to set up a pension for your employees, be sure to speak to a knowledgeable professional first.
ACA-compliant group health plans and Marketplace Coverage Options Disclosure
Even if your small business doesn’t offer a formal group health plan, the Affordable Care Act (“Obamacare”) still affects you in two ways.
First, you’re supposed to provide each new hire with a Health Insurance Marketplace Coverage Options Disclosure form, even if your business doesn’t offer health insurance to employees. (If you haven’t been doing this, don’t worry: as silly as it sounds there’s zero penalty for breaking this law.)
Second, know that it’s actually quite easy to accidentally create a non-compliant “group health plan” just by informally reimbursing employees for individual health insurance. And while relatively new legislation has authorized some types of reimbursement arrangements since the date of that blog post, small businesses have to be very careful to make sure their plans qualify. This issue is a complex area of federal tax law, so if you want to set up any type of health insurance benefit employees, be sure to speak to a knowledgeable professional first.