Washington, D.C., may not be a full-fledged state, but that doesn’t mean small businesses that do business there need only worry about federal taxes. Like most states, the District of Columbia imposes various business taxes and tax reporting duties that could affect the profitability of your small business and require significant resources to ensure compliance.
What is the corporate franchise tax?
D.C. imposes a franchise tax on corporations for the privilege of carrying on or engaging in any business within the District and of receiving income from sources within the District.
The rate is 8.25% of taxable income for every corporation, whether domestic or foreign. Taxable income is defined as the amount of net income derived from sources within the District.
Corporations must pay a minimum tax as follows:
- $250 minimum tax, if D.C. gross receipts are $1 million or less
- $1,000 minimum tax, if D.C. gross receipts exceed $1 million
“D.C .gross receipts” for the minimum tax include District gross receipts from any activity, such as sales, rents, services, or commissions from any source within the District. Gross receipts are determined without deduction of any expenses.
Does the corporate franchise tax apply to S corporations?
Yes. For District tax purposes, an S corporation is treated as a C corporation.
How is the corporate franchise tax paid?
Generally, every corporation must file a Form D-20, “District of Columbia (DC) Corporation Franchise Tax Return”—including small businesses, professional corporations, and S corporations—if it’s carrying on or engaging in any trade, business, or commercial activity in D.C. or receiving income from D.C. sources.
Returns should be filed, with any payment due, by April 15 for calendar-year filers or the 15th day of the fourth month after the close of the tax year for fiscal-year filers.
You can file your corporate franchise tax return electronically through MyTax DC or by mail. If you’re mailing your return with a payment, send it to:
Office of Tax and Revenue
P.O. Box 96166
Washington, D.C. 20090-6166
If you’re submitting a no-payment or refund return, mail it to:
Office of Tax and Revenue
P.O. Box 96148
Washington, D.C. 20090-6148
Note: Any tax payment that exceeds $5,000 per period must be paid electronically.
Are filing extensions available?
You can request an extension of time to file your return on Form FR-120, “Extension of Time to File a DC Corporation Franchise Tax Return,” no later than the return due date. An extension of time to file doesn’t extend your time to pay, though. You must pay any tax liability with the extension request, or the request will be denied and you may be subject to penalties for failure to file or failure to pay.
What is the unincorporated business franchise tax?
This tax generally applies to any trade or business—other than one conducted or engaged in by a corporation—that would be taxable if conducted or engaged in by a corporation. Partnerships and limited liability companies (LLCs) aren’t subject to the tax, as their owners are taxed on an individual level.
The tax is 8.25% of taxable income. Taxable income is defined differently for the unincorporated business franchise tax than for the corporate franchise tax. It’s the amount of net income derived from D.C. sources less a $5,000 exemption. D.C. also allows a deduction for a 30% salary allowance for owners.
Unincorporated businesses must pay a minimum tax as follows:
- $250 minimum tax, if D.C. gross receipts are $1 million or less
- $1,000 minimum tax, if D.C. gross receipts exceed $1 million
Does the tax apply to every unincorporated business?
Your unincorporated business isn’t required to pay the franchise tax if:
- More than 80% of your gross income comes from personal services provided by the members of the entity, and
- Capital isn’t a material income-producing factor.
Personal services include:
- Accounting
- Actuarial science
- Architecture
- Consulting
- Engineering
- Health (including veterinary)
- Law
- The performing arts
In addition, businesses that—by law, customs, or ethics— can’t be incorporated are exempt.
“Qualified high technology businesses” (QHTBs) are excluded from liability, too. A QHTB is one that:
- Is an individual or entity organized for profit,
- Leases or owns an office in the District,
- Has ten or more qualified employees in the District,
- Derives at least 51% of its gross revenues earned in the District from one or more of certain “permitted” activities, and
- Is registered with the D.C. government as a business in D.C.
What are the filing obligations for unincorporated businesses?
Generally, any such business with gross receipts exceeding $12,000 must file Form D-30, “Unincorporated Business Franchise Tax Return,” even if it doesn’t have net income.
Returns should be filed, with any payment due, by April 15 for calendar-year filers or the 15th day of the fourth month after the close of the tax year for fiscal-year filers.
You can file your franchise tax return electronically through MyTax DC or by mail. If you’re mailing your return with a payment, send it to:
Office of Tax and Revenue
P.O. Box 96165
Washington, D.C. 20090-6165
You should mail a no-payment or refund return to:
Office of Tax and Revenue
P.O. Box 96193
Washington, D.C. 20090-6193
Note: Any payment that exceeds $5,000 per period must be paid electronically.
Are filing extensions available?
You can apply for a six-month extension (or seven-month if you’re a combined reporting filer) by filing Form FR-130, “Extension of Time to File Unincorporated Business Franchise Tax Return,” by the due date of the return. No additional extensions are available unless the taxpayer is outside the United States.
Do corporations or unincorporated businesses need to pay estimated taxes?
Both corporations and unincorporated businesses that must file a tax return are required to pay estimated taxes if their tax for the year exceeds $1,000. You can pay your estimated tax payments online, or use vouchers from the D-20ES or D-30ES booklet.
The Office of Tax and Revenue will charge 10% interest, compounded daily, on any underpayment of estimated taxes.
What is the gross receipts tax?
The gross receipts tax is imposed on top of the District of Columbia franchise tax for some businesses. It’s applied to the sale of a variety of products and services in the District, including:
- Natural gas
- Local calls
- Commercial mobile
- Toll telecommunications
- Heating oil
- Telephone services
- Electricity
- Cable television service
- Satellite relay television service
- Any other distribution of television
The rate is generally 10-11%.
How is the gross receipts tax paid?
There are a variety of tax returns for the gross receipts tax, depending on the product or service sold in the District. Gross receipts tax returns are due on the 20th day of each calendar month, reporting the tax due for the preceding calendar month.
Do partnerships have any filing obligations?
All partnerships must file an information return, Form D-65, “District of Columbia (DC) Partnership Return of Income Tax,” except:
- Partnerships required to file an unincorporated business franchise tax return or corporation franchise tax return
- LLCs
- Publicly traded partnerships that filed a federal corporation return
Note: LLCs are classified for D.C. tax purposes in the same manner that they are for federal income tax purposes.
Returns are due by April 15 for calendar-year filers or the 15th day of the fourth month after the close of the tax year for fiscal-year filers. You can file online or mail it to:
Office of Tax and Revenue
1101 4th Street, SW, FL4
Washington, D.C. 20024
Can partnerships obtain filing extensions?
To request an extension of time to file, submit Form FR-165, “Extension of Time to File a DC Partnership Return,” by the due date of your return. A six-month extension of time to file will be granted. No further extension is allowed unless you’re outside of the country.
What is the “ballpark fee”?
This fee applies to taxpayers that:
- Have income of $5 million or more in annual District gross receipts, and
- Either are:
- Subject to filing franchise tax returns (corporate or unincorporated), or
- Employers required to make unemployment insurance contributions.
“Feepayers” must file and pay the ballpark fee, with Form FR-1500, electronically by June 15. The fee due depends on the amount of annual gross receipts from June to May:
- Gross receipts of $5 million to $8 million: $5,500 fee
- $8,000,001 to $12 million: $10,800
- $12,000,001 to $16 million: $14,000
- More than $16,000,001: $16,500
Certain industries are subject to other baseball-related taxes and fees.
Does D.C. offer businesses any tax credits or incentives?
The District of Columbia offers a variety of refundable and nonrefundable credits against both the corporate franchise tax and the unincorporated business franchise tax. Be aware, though, that nonrefundable credits can’t be used to offset the required minimum tax.
Is business personal property taxed in D.C.?
Generally, all corporations and partnerships that own or hold personal property in trust in the District must file Form FP-31, “District of Columbia Personal Property Tax Return.” The personal property tax year runs from July 1 to June 30, and the tax return is due by July 31 of each year.
Are any excise taxes in effect?
D.C. imposes several excise taxes, including on alcoholic beverages, cigarettes, and motor fuel.
Does D.C. have sales and use taxes?
All tangible personal property, digital goods, and select services sold or rented at retail to businesses or individuals delivered in the District are subject to a 6% sales tax (some items are subject to higher rates). A use tax is imposed at the same rate as the sales tax on purchases delivered outside the District and then brought into the District to be used, stored, or consumed.
Are remote sellers subject to sales and use taxes?
Out-of-state sellers with no physical presence in the District of Columbia must collect and remit District sales tax if they had, in the previous calendar year, or will have in the current calendar year:
- More than $100,000 of gross receipts from retail sales delivered into the District, or
- More than 200 separate retail sales delivered in the District.
Sales to D.C. purchasers with valid District sales tax exemption certificates (see below) count when determining whether the thresholds have been satisfied.
Remote sellers must begin to collect the tax as soon as they exceed one of those two thresholds. The remote seller’s obligation will also extend to the following calendar year, even if sales in that year don’t meet the thresholds.
Sellers that deliver goods or taxable services in the District through employees or independent contractors have a physical presence in the District regardless of whether they have a location there. They must collect and remit District sales tax on their gross receipts for all sales in D.C.
Remote sellers should register as a new business online using Form FR-500, “New Business Registration,” and indicate that they are a remote seller when prompted.
When are sales and use tax remittances due?
Returns and payments are due by the 20th day of the month following the end of the monthly, quarterly, or annual period. For annual filers, this is October 20.
The applicable tax return and filing frequency generally depend on your sales and use tax liability, or if you’re a remote seller:
- If your sales and use tax liability is less than or equal to $200 per period, you need to file only annually with Form FR-800A, “Sales and Use Tax Annual Return.”
- If your sales and use tax liability is greater than or equal to $201 and less than or equal to $1,200 per period, you’ll file quarterly with Form FR-800Q, “Sales and Use Tax Quarterly Return.”
- If you’re a marketplace facilitator or a remote seller, or your sales and use tax liability is greater than or equal to $1,201 per period, you file Form FR-800M, “Sales and Use Tax Quarterly Return,” monthly.
Sales and use tax returns must be filed online. You’re required to file a return even if you have no tax due for a given period.
Does D.C. grant any exemptions?
Several exemptions are allowed based on the type of purchaser or the good or service sold.
What are employers’ withholding tax obligations?
Employers that pay wages to D.C. residents generally must withhold D.C. income tax (this is in addition to federal withholding for Social Security, Medicare, and federal unemployment taxes).
You’ll need to obtain a Form D-4, “Employee Withholding Certificate Form,” from every employee. You use those forms and the withholding tables to determine just how much to withhold for each employee.
Employers are required to file regular returns, even for periods in which they have no withholding to remit. Quarterly filers use Form FR-900Q, “Employer/Payer Withholding Quarterly Return,” which must be filed electronically, according to the following schedule:
- 1st quarter (January, February, March): April 30
- 2nd quarter (April, May, June): July 31
- 3rd quarter (July, August, September): October 31
- 4th quarter (October, November, December): January 31
Annual filers use Form FR-900A, “Employer/Payer Withholding Tax Annual Return.” This form is due by January 31.
Quarterly deposits of the tax withheld from wages must be paid on or before the 20th day of the month after the close of each quarter. Annual deposits of tax withheld from wages are due on or before the 20th day of the month following the close of the annual period. If you’re not paying electronically and are remitting less than $5,000, you can use Form FR-900P, “Payment Voucher for Withholding Tax.”
Which businesses must pay unemployment insurance taxes in D.C.?
Employers that pay wages to one or more employees for performing services in D.C. must pay unemployment insurance taxes on the first $9,000 of wages paid to each employee (the state unemployment insurance tax is in addition to the federal unemployment tax). It doesn’t matter whether the services are performed on a full-time, part-time, or temporary basis. An employer becomes liable the first day that wages are paid for services provided in the District.
What are the unemployment insurance tax rates?
New employers are assigned a standard tax rate equal to the average rate of contributions paid by all employers the preceding year, or 2.7%, whichever is higher. After 36 months of liability, your account will be rated on your claims experience as of the rate computation date (June 30).
Generally, higher rates are assigned to employers with high employee turnover because their unemployment experience results in greater employee payouts. But several factors determine the actual experience rate, including:
- The amount of benefits paid to former employees and charged to an employer’s account (every quarter, employers receive a charge statement detailing all charges against the account for that quarter),
- The amount of unemployment insurance taxes paid, and
- The average size of the employer’s annual taxable payroll for the three preceding years.
Your tax rate is also affected by the status of the Unemployment Insurance Trust Fund. During each calendar year, one of six tax tables is in effect, depending on the balance in the Trust Fund as of the prior September 30. You should receive a tax rate notice every December or January.
How are unemployment taxes paid?
The Department of Employment Services requires all employers with five or more employees to file Contribution and Wage Reports online. Employers with fewer than five employees may submit the quarterly contribution and wage report on paper using Form UC30, “Employer’s Quarterly Contribution and Wage Report.”
Reports are due after the end of the quarter as follows:
- 1st quarter (January, February, March): April 30
- 2nd quarter (April, May, June): July 31
- 3rd quarter (July, August, September): October 31
- 4th quarter (October, November, December): January 31
For annual filers, the report deadline is April 15.
Federal and state tax obligations can take up a lot of a small business owner’s attention and time. Gusto’s payroll service can simplify matters by making it easier to pay employees and automatically file your payroll taxes.
