There may be an unintended trap for directors who have their companies file and pay the B&O tax for them. As you may or may not be aware, in the last legislative session the Washington State legislature went out of its way to definitively and positively answer in the affirmative that directors must pay B&O tax on director fees. For a discussion, see here.
The state permits companies to enter into an agreement to file and pay the B&O tax for the directors covered by the agreement. (See http://dor.wa.gov/Docs/forms/Misc/DirFeesTaxPmtAgrmnt.pdf.)
By its terms, the agreement requires quarterly filing, though the parties can agree to a different reporting cycle. The problem is that the small business tax credit is tied to the frequency of the reporting cycle. The credit is $71.00 for a monthly filer; $211 for a quarterly filer and $841.00 for an annual filer. I f the taxpayer exceeds the credit for a filing period, it cannot “borrow” the remaining credit for future periods. Below are some simple illustrative examples:
Example 1: In 1Q, the director is paid $11,667 for the entire year, and taxed at the rate of 1.8%, the tax due would be $211. According to DOR’s matrix for quarterly reporting, the credit for the quarterly reporting would be $211. The net tax due would be $0. (See http://dor.wa.gov/Docs/forms/ExcsTx/ComExcsTxRtrn/sbc_Quarterly.pdf.)
Example 2: In 1Q, the director is paid $11,667 and the tax bill is $0. In 3Q, the director is paid $15,000, and taxed at the rate of 1.8%. The tax bill would be $270. According to DOR’s matrix for quarterly reporting mentioned above, the descending small business tax credit would go from $211 to $155. Subtracting $155 from $270 leaves a tax of $115. The net tax due on the aggregate of $26,667 in director fees would be $115. (See http://dor.wa.gov/Docs/forms/ExcsTx/ComExcsTxRtrn/sbc_Quarterly.pdf.) The director could not use the credit still available for 4Q.
Example 3: For the calendar year, the director is paid same amount as in Example 2 — $26,667. The tax on $26,667 at 1.8% is $480. According to DOR’s matrix for annual reporting, the credit would be $481. The net tax due would be $0. (See http://dor.wa.gov/Docs/forms/ExcsTx/ComExcsTxRtrn/sbc_Annual.pdf.)
Comparing the results in Example 2 and Example 3, if the company files on a quarterly basis, then the director will pay $115 more than if the company had paid on an annual basis. This is true even though the total annualized director fees paid was the same in both examples.
The agreement permits a different reporting cycle if the parties agree. Thus, the first step is for the company to request annual reporting. If DOR will not change the reporting cycle, then the next step would be for the company to consider splitting the director fees into quarterly payments so as to take full advantage of small business tax credit. An alternative might be for the director to self-report the director fee on the assumption that the director would be placed on an annual reporting cycle.