A Nevada resident owns stock in a C corporation headquartered in Seattle. The corporation earns millions of dollars and pays the shareholder a substantial dividend.
Does Washington get to collect its new 9.9% income tax on that dividend?
Generally, no. And that distinction could become increasingly important when Washington’s income tax takes effect in 2028.
That answer assumes the shareholder is genuinely not a Washington resident, owns the shares as a personal investment, and does not employ them in a Washington business. That is my reading of the enacted nonresident sourcing rule. The company’s Washington headquarters alone should not make the dividend Washington-source income.
But there is a federal tax cost to the C-corporation structure. The corporation generally pays tax on its profits, and the shareholder pays tax again when those profits arrive as dividends. Both parts matter when comparing a C corporation with an S corporation or LLC.
Why the owner’s residence matters
Washington’s new income tax is scheduled to begin January 1, 2028. The rate is 9.9% of Washington taxable income, after the applicable deductions and adjustments. The general standard deduction is $1 million, shared by spouses or registered domestic partners. RCW 82A.04.030; RCW 82A.04.360.
For a Washington resident, dividends generally enter the Washington income-tax base regardless of where the corporation operates. For a nonresident, Washington needs a Washington source.
The relevant provision is §401(2)(f) of ESSB 6346 (2026 c 238), now RCW 82A.04.410(2)(f). It reaches dividends and other intangible-property income only to the extent the property was employed in a business carried on in Washington. More on that below.
For our Nevada shareholder holding the shares as a personal investment, the dividend generally should be outside Washington’s income-tax base. Nevada imposes no individual income tax.
The nonresident assumption has to be real. A Nevada address alone is not enough. Washington’s definition can also reach someone domiciled elsewhere who maintains a Washington abode and spends more than 183 days here during the year. RCW 82A.04.010(8).
A $2 million dividend, side by side
The Seattle corporation pays a $2,000,000 dividend on identical blocks of stock to two shareholders. Each holds the shares as a personal investment. One lives in Nevada; the other lives in Washington. Assume a 2028 tax year and no other income, deductions, or credits.
| Nevada resident | Washington resident | |
|---|---|---|
| Dividend included in federal AGI | $2,000,000 | $2,000,000 |
| Washington base income from the dividend | $0 | $2,000,000 |
| Standard deduction | n/a | ($1,000,000) |
| Washington taxable income | $0 | $1,000,000 |
| Washington income tax at 9.9% | $0 | $99,000 |
Both calculations start with federal adjusted gross income, and the dividend is in both shareholders’ federal AGI. RCW 82A.04.010(3), (11), (12).
The Nevada shareholder owes no Washington income tax on the dividend merely because the corporation operates in Washington. A nonresident’s Washington base income includes only Washington-source income, and this dividend is not Washington-source under RCW 82A.04.410(2)(f).
The Washington shareholder gets no comparable exclusion. Residents allocate all income to Washington, and there is no dividend subtraction. The full $2,000,000 is Washington base income. The standard deduction then brings taxable income to $1,000,000, and the 9.9% rate applies to that. RCW 82A.04.410(1); RCW 82A.04.030.
Spouses and registered domestic partners share one $1,000,000 deduction whether they file jointly or separately, so a married Washington couple receiving the same dividend gets the same $99,000 result. The deduction is $1,000,000 for 2028. RCW 82A.04.360; RCW 82A.04.367.
That $99,000 assumes the dividend is the household’s only income. If other income already uses up the deduction, every dividend dollar is taxed at 9.9%. Charitable deductions and credits can move the number the other way.
The federal tax on the dividend is the same for both shareholders.
Does owning the company change the answer?
Here is the operative language of RCW 82A.04.410(2)(f). For a nonresident, Washington-source income includes:
“Income from intangible personal property, including annuities, dividends, interest, and gains from the disposition of intangible personal property, to the extent that the intangible personal property was employed in a business, trade, profession, or occupation carried on within this state.”
The question is whether the shareholder’s stock was employed in a business carried on in Washington. Not whether the corporation does business here. The corporation is a separate taxpayer, and its business is not the shareholder’s business.
That holds for a controlling shareholder too. Owning a majority of the stock, voting it, and electing the board are what owning stock means. In my view, they do not by themselves turn the shares into an asset employed in the shareholder’s own Washington trade or business.
The shareholder’s own activities can change the analysis:
- The stock belongs to the shareholder’s Washington business. If the shares are held in, or used in, a sole proprietorship or pass-through business carried on in Washington, the dividend can become part of that business’s income under RCW 82A.04.440. Dividends are apportionable if acquiring, managing, employing, or disposing of the stock is or was related to the operation of that business. Nonapportionable dividends are allocated to Washington if the taxpayer’s commercial domicile is here. “Taxpayer” in that section means the pass-through entity or individual conducting business in Washington, not the corporation paying the dividend. RCW 82A.04.440(5), (8), (10).
- The shareholder runs an investment or holding business from Washington. Stock bought and managed as part of a business conducted here looks different from a personal investment.
- The shareholder also runs the company day to day from Washington. Salary for work performed here is Washington-source. Whether the stock is also employed in that owner’s Washington profession is not answered by the statute.
I am not aware of any published Department of Revenue guidance or judicial decision interpreting this provision. The passive-investor case is clear enough. The owner-operator cases are not.
The federal tax does not disappear
A C corporation is a separate federal taxpayer. It generally pays federal income tax at 21%. When it distributes its after-tax earnings as dividends, its shareholders generally pay federal income tax on those dividends. The corporation does not deduct the dividend payment. IRS: Forming a corporation; Form 1120 instructions, Schedule J.
Here is a simple example using each additional $100 of corporate taxable profit. Assume the corporation pays the regular 21% federal rate, distributes all the remaining profit, and the entire dividend qualifies for the shareholder’s 20% qualified-dividend rate plus the 3.8% net investment income tax.
| Step | Amount |
|---|---|
| Corporate taxable profit before federal tax | $100.00 |
| Federal corporate income tax at 21% | $21.00 |
| Remaining profit distributed as a dividend | $79.00 |
| Shareholder’s federal tax at 23.8% | $18.80 |
| Amount the shareholder keeps | $60.20 |
| Combined federal tax | $39.80 |
The combined federal burden is approximately 39.8%. This calculation leaves out B&O and other business taxes.
The assumptions are important. Qualified dividends can receive a 0%, 15%, or 20% federal rate, depending on taxable income. Qualification includes holding-period requirements. The 3.8% net investment income tax has its own income thresholds and calculation. A nonqualified dividend can face ordinary federal income-tax rates. IRS Publication 550; IRS Topic 559.
And a qualified dividend remains a dividend. Receiving a favorable federal rate does not turn it into a stock-sale gain or make it eligible for Washington’s long-term-capital-gain subtraction. IRS Topic 404; RCW 82A.04.210.
An S corporation or LLC can produce a different result
Now change the facts. The Nevada owner holds an S corporation, or an LLC taxed as a partnership, conducting business in Washington.
Washington can still tax the owner’s Washington-source share of the business income. Moving the owner does not eliminate the business’s Washington-source income. The amount depends on the allocation and apportionment rules, applicable deductions, and credits. RCW 82A.04.420.
The tax follows the owner’s taxable share of the income; it does not generally wait for a cash distribution. We discuss the state rules in the Washington PTE election article.
Salary is a separate issue too. Compensation for work performed in Washington generally remains Washington-source income for a nonresident, subject to the statutory exceptions. Calling a payment a dividend does not settle whether it is actually compensation. RCW 82A.04.430.
There is one more wrinkle for owners with other Washington-source income. Washington prorates a nonresident’s standard deduction using Washington base income divided by federal adjusted gross income from all sources, with the fraction capped at one. An out-of-state dividend included in federal AGI can reduce that deduction even when the dividend itself is excluded from Washington base income. Give the Nevada shareholder above $500,000 of Washington-source salary on top of the $2,000,000 dividend: the fraction is $500,000 / $2,500,000, so the deduction shrinks to $200,000. Washington taxable income is $300,000, and the tax is $29,700. RCW 82A.04.363.
This makes the C-corporation distinction worth understanding. It does not establish that converting to a C corporation will save you money. Compare the corporate and shareholder federal taxes, the pass-through alternative, any PTE election and available credits, and the tax consequences of a later sale.
If you already own a C corporation and are considering a move, your dividend analysis may be quite different from that of your neighbor who owns an S corporation. Run the numbers for the entity you actually own.
For the broader comparison, see C Corp vs. S Corp vs. LLC Under Washington’s New Income Tax.
