An unincorporated business tax (UBT) is a tax imposed on the income of unincorporated businesses — go figure. Unincorporated businesses include sole proprietorships, partnerships, limited liability companies (LLCs), and certain other entities that are not taxed as corporations.
UBTs are typically imposed by state and local governments. The tax rates and rules vary from jurisdiction to jurisdiction. However, most UBTs are calculated as a percentage of the business’s net income.
Are there any business entity types that are exempt?
Some businesses are exempt from UBTs. These exemptions typically include businesses that are owned and operated by individuals for personal purposes, as well as businesses that are engaged in certain types of activities, such as religious or charitable work.
Here are some examples of businesses that may be subject to UBT:
- Freelancers and consultants
- Small businesses that are owned and operated by individuals
- Limited liability companies (LLCs)
- Family businesses
- Professional practices, such as law firms and accounting firms
Do Seattleites pay Unincorporated Business Tax?
Obviously, in Seattle, you don’t pay an income tax, but there your business can be subject to the unincorporated business tax. The UBT rate is 1.75% of net income. Net income is calculated by subtracting all allowable business expenses from the business’s gross income. There are a number of deductions that businesses may be able to take to reduce their net income, such as deductions for business expenses, such as travel, meals, and equipment.
Businesses that are subject to the UBT must file a return with the City of Seattle and pay any tax that they owe by April 15th of each year. Failure to file a return or pay the tax on time can result in penalties and interest charges.
What if you Restructured your Business to an S Corp?
Suppose you are the sole owner of an S Corp that operates in Seattle and your business had net profits of $100,000 in the current year. If you do not pay yourself a salary, you will have to pay UBT on the entire $100,000 of net profits. However, if you pay yourself a salary of $50,000, you will only have to pay UBT on the remaining $50,000 of net profits.
At the UBT rate of 1.75%, you would save $875 in UBT by paying yourself a salary of $50,000.
In addition to reducing your UBT tax, paying yourself a salary can also provide you with the other benefits that I mentioned in my previous response, such as Social Security and Medicare benefits, unemployment benefits, and the ability to deduct business expenses from your salary.
It is important to note that the IRS has rules about what constitutes a “reasonable” salary for an S Corp owner. If you pay yourself a salary that is too high, the IRS may consider it to be disguised dividends, which would be taxed twice.
To determine a reasonable salary, you should consider the same factors that I mentioned in my previous response, such as your education and experience, the responsibilities of your job, the salary levels of similar positions in your industry, and the size and profitability of your S Corporation.
If you are unsure about what constitutes a reasonable salary for yourself, you should consult with a tax advisor.