Navigating Washington’s 2026 Tax & Business Legislation
By Joe Wallin
Published February 2, 2026
Washington’s 2026 legislative session is off to a brisk start, with lawmakers filing bills and holding hearings well before the 60-day session opened. Last year’s $78 billion budget included the largest tax overhaul in decades, expanding the business-and-occupation (B&O) tax and retail sales tax to new industries. This year, legislators are debating new revenue proposals aimed at plugging budget gaps and funding social services. Below is a summary of notable bills and recently enacted changes affecting Washington startups and employers.
Proposed taxes in the 2026 session
Well Washington payroll tax (HB 2100)
Representative Shaun Scott introduced House Bill 2100, which would impose a 5 percent payroll tax on large employers for payroll expenses above the Social Security taxable maximum (currently about $176,000 per year). The bill targets companies with more than 20 employees and $5 million in gross receipts. Only payroll for employees earning above the threshold would be taxed, meaning a worker’s first roughly $125,000–$176,000 of annual wages would remain untaxed.
Revenues would be deposited into a new “Well Washington Fund” supporting healthcare, education, housing, and other social services. Proponents argue the tax could raise billions for essential programs; opponents contend it would discourage job growth and make the state less competitive.
Youth Behavioral Health Tax (HB 2038 / SB 5799)
Another proposal would address the youth mental-health crisis by creating a 0.4 percent B&O tax on the gross income of social-media platforms. House Bill 2038 and its Senate companion would deposit the revenue into a Youth Behavioral Health Account to support tele-behavioral health services, a chief youth behavioral health officer, and other programs.
The tax would apply only to companies meeting the statutory definition of a social-media platform. Nonprofit social platforms would be exempt.
Other pre-filed bills
Lawmakers filed numerous bills ahead of the session to get on the radar of committee leaders. Among them is a Republican proposal to expand the sales-tax definition of temporary staffing services to include paid protestors. Another bill seeks to reinstate a tax exemption for precious-metal bullion, while others propose fee increases to fund consumer arbitration and nuclear-energy studies. These measures illustrate the breadth of fiscal ideas under consideration.
Early-session revenue debates
B&O surcharge on high-grossing businesses (HB 2045 / HB 2081)
Democratic budget writers have proposed tiered B&O tax surcharges targeting very large businesses. The House plan would impose a 1 percent B&O surcharge on businesses with Washington taxable income above $250 million, while exempting manufacturers and financial institutions that already pay surcharges. A companion bill would increase the existing B&O surcharge on financial institutions from 1.2 percent to 1.9 percent.
Separately, Engrossed Substitute House Bill 2081, enacted in 2025, created a temporary 0.5 percent B&O surcharge on high-grossing businesses with taxable income over $250 million. The surcharge runs from January 1, 2026 through December 31, 2029 and is in addition to other B&O taxes. Advanced-computing businesses and financial institutions are exempt, and the threshold excludes sales of manufactured goods, food, fuel, and other items.
B&O tax rate increases
Washington’s 2025 tax package raised several B&O rates. Starting October 1, 2025, the B&O rate for the services and other activities classification increased to 2.1 percent for businesses with over $5 million in gross income, while smaller service providers under $1 million continue to pay 1.5 percent. The B&O rates for retailing, manufacturing, and wholesaling classifications will rise to 0.5 percent in 2027.
The surcharge on financial institutions climbed from 1.2 percent to 1.5 percent effective October 1, 2025, and the advanced-computing surcharge jumped from 1.22 percent to 7.5 percent, with the annual cap increasing from $9 million to $75 million.
These rate increases build on Washington’s progressive tax structure and primarily impact large corporations. Startups and smaller businesses should review their B&O classification to determine whether the new thresholds apply.
Social-media tax and other targeted proposals
In addition to the youth behavioral health tax described above, lawmakers are discussing bills that would expand the advanced-computing surcharge cap and repeal certain tax preferences. Discussions also continue around imposing a statewide income tax on very high earners and increasing alcohol and nicotine taxes, though these ideas have not yet advanced beyond informal talks.
Recently enacted changes effective in 2025‑26
Expansion of the retail sales tax to services
Effective October 1, 2025, Washington significantly expanded the definition of a “retail sale.” Numerous services—including advertising services, information-technology support, custom website development, temporary staffing, investigation and security services, live presentations, and sales of custom software—are now classified as retail sales.
Businesses providing these services must collect and remit retail sales tax. Previously, many of these activities were taxed under the service B&O category. For businesses, this means updating invoicing and point-of-sale systems and potentially increasing prices to cover the tax.
The expansion also affects B&O classifications. Services newly classified as retail sales now fall under the retailing B&O tax rather than the “services and other activities” classification. The legislation further introduced tiered B&O rates for service businesses, highlighting Washington’s graduated approach to taxing service providers.
Temporary 0.5 percent surcharge and other 2026 changes
The 2025 tax package added a temporary 0.5 percent surcharge on businesses with taxable income above $250 million, effective January 1, 2026. Advanced-computing businesses and financial institutions are exempt, and the surcharge expires at the end of 2029.
The legislation also repealed exemptions for many digital-automated services, making human-effort services, live presentations, data-processing, and digital advertising services subject to retail sales tax. The definition of advertising services was broadened to include search-engine marketing, lead generation, campaign planning, and evaluation of website traffic.
Implications for startups and small businesses
Washington’s unique tax system—no personal income tax but a variety of excise taxes—creates both opportunities and compliance challenges. The payroll tax proposal would primarily affect larger employers, but startups approaching the 20-employee and $5 million-revenue thresholds should monitor its progress.
The expanded retail sales tax on services means technology and marketing companies must charge sales tax on invoices for advertising, IT support, and custom software. Meanwhile, B&O rate increases and surcharges could squeeze margins for fast-growing startups once they cross key revenue thresholds.
Practical steps include reviewing contracts and pricing, updating accounting systems, monitoring legislative developments, and modeling tax impacts as companies scale.
Conclusion
Washington’s tax landscape is evolving. The 2025 tax package already expanded sales and B&O taxes, and early proposals for 2026—including a payroll tax on high-paid workers and a social-media tax to fund youth behavioral health—signal continued experimentation. While these measures aim to generate revenue for education, healthcare, and social services, they also add complexity for businesses operating in the state. Founders and executives should closely follow legislative developments and consult legal and tax professionals to stay compliant and plan ahead.
