Taxes in Washington, D.C.
Welcome to Washington, D.C! The District has various types of taxes including the Resident income tax, the Corporate franchise tax, the Unincorporated franchise tax, sales tax on Goods, sales tax on certain Services, Use taxes, Payroll taxes and Property taxes. These tax laws are complicated and running afoul of these rules can subject you to major financial penalties, so it is usually best to consult a competent tax advisor.
Resident Income Tax
You are required to file a D.C. individual tax return (Form D40) if: (1) You were a resident of the District of Columbia and you were required to file a federal tax return; (2) Your permanent residence was in the District of Columbia for either part of or the full taxable year; (3) You lived in the District of Columbia for 183 days or more during the taxable year, even if your permanent residence was outside the District of Columbia.
Unlike most States, D.C. does not have a nonresident individual income tax return. If you are seeking a refund of taxes withheld, you would file Form D40-B, Nonresident Request for Refund. Metro D.C. wage earners owe taxes to the jurisdiction where living and not where working.
The individual tax rates for District of Columbia are:
|If the taxable income is:||The tax is:|
|Not over $10,000||4% of the taxable income|
|Over $10,000 but not over $40,000||$400, plus 6% of the excess over $10,000.|
|Over $40,000 but not over $60,000||$2,200, plus 6.5% of the excess over $40,000.|
|Over $60,000 but not over $250,000||$3,500, plus 8.5% of the excess over $60,000.|
|Over $250,000 but not over $500,00||$19,650 plus 9.25% of the excess above $250,000.|
|Over $500,000 but not over $1,000,000||$42,775 plus 9.75% of the excess above $500,000.|
Over $1,000,000 the tax is $91,525 plus 10.75%
District tax rates are much higher than neighboring Virginia and are comparable with Maryland, which has a county tax. Tax Return due date is April 15th and if you expect to owe but are not yet ready to file, you need to submit an estimated payment with Form FR-127, Extension of Time to File. Taxpayers are encouraged to create an account with the Office of Tax & Revenue (OTR) to track filings and make payments https://mytax.dc.gov/_/
D.C. OTR charges significant penalties and interest for non-compliance, including:
- A penalty of 5% per month if you fail to file a return or pay any tax due on time, not to exceed an additional amount equal to 25% of the tax due;
- A 20% penalty on the portion of an underpayment of taxes if attributable to negligence.
- Interest of 10% per year, compounded daily, on a late payment;
- A one-time fee of 10% to cover internal collection efforts on any unpaid balance after 90 days.
Though the federal mandate has been eliminated, the District has enacted legislation that requires District residents to have minimum essential health coverage. Taxpayers without coverage pay a penalty equal to 2.5% of their taxable income. Taxpayers can seek an exemption by filing Form HSR, DC Healthcare Shared Responsibility Schedule.
D.C. Franchise Taxes
The D.C. Unincorporated Business Franchise Tax is imposed on certain unincorporated businesses carrying on or engaging in a trade or business in the District with gross receipts of $12,000 or greater. The tax applies to certain LLC, Partnership and Individuals and is filed on Form D-30. Taxpayers are subject to tax at a rate of 8.25% on net profits, with a minimum tax due of $250. A reasonable salary allowance is allowed for owners to arrive at taxable income.
An unincorporated business carrying on a business in the District and another jurisdiction, must apportion its income among D.C. and the other jurisdiction based on sales. Full payment of tax is due on April 15th and estimated tax payments are required. Penalties and Interest for late filing or late payment of tax can be severe. You must register for a franchise tax account with the Office of Tax and Revenue (OTR) prior to filing any business tax form https://otr.cfo.dc.gov/page/new-business-registration
Most self-employed consultants are exempt from the tax filing requirement if 80 percent of gross income is derived from personal services rendered by the members of the entity and capital is not a material income-producing factor. Thus, many self-employed individuals are able to escape the unincorporated franchise tax as if they were being paid wages. For D.C. resident taxpayers who do owe franchise tax, an adjustment subtraction is available on Form D-40 for income taxed on a franchise tax return. While this avoids double taxation, it may expose a taxpayer to a higher franchise tax rate than he would otherwise pay as an individual.
Rental real estate activities that generate income of $12,000 or greater are required to register and pay the unincorporated franchise tax. Though many rental activities generate tax losses, the minimum payment of $250 is due. Rental properties sold at a taxable gain would also owe franchise tax. In order to apply or maintain your business license for your rental activity, you will have to attest that no taxes are owed to OTR and that the business has “clean hands.”
Corporations (including LLC’s taxed as a corporation) are required to file Form D-20, Corporate Franchise Tax Return and are subject to franchise tax based on a single sales factor and market source rules. This recent change was intended to increase the tax base as D.C. lowers its franchise tax rate in recent years. However, many Corporations are arguably overpaying their Franchise Tax as they may have foreign source contracts that appeal to markets outside of the District.
For District purposes, a Subchapter S Corporation is a C Corporation. Said another way, the District does not recognize the S Corporation flow through for federal tax purposes. A single member D.C. LLC who has elected to be taxed as a separate entity, now is subject to a corporate franchise tax. This entails tax account registration, estimated tax payments, perhaps a higher tax rate and possible double taxation, as Virginia does not allow a credit for franchise taxes paid.
Before establishing your choice of business entity, you should consult a District of Columbia Business Franchise Tax Attorney to evaluation your options and tax liability, particularly if you reside outside the District.
DC LLC Formation
The Department of Consumer and Regulatory Affairs administers business licensing and entity formations, including limited liability companies (LLCs). An LLC is an unincorporated association, with one or more members. Owners risk only their investment, with personal assets not at risk. It is generally easier to set up and maintain than a corporation. The filing fee to establish an LLC in the District is $300 and you can apply online here: https://corponline.dcra.dc.gov/ Other than a company name and address, the Organizer will need a Registered Agent with a District address for service of process. Every LLC is required to file a two-year report with the Corporations Division to maintain good standing within the District, otherwise the LLC will go dormant.
The District allows registration and use of a trade name, which is a business name used in practice which is different from your company or individual name. A trade name DBA (doing business as) is a fictitious name used in business that does not include the full legal name of all the owners of the business. Your business may have only one corporate name but may have multiple trade names. Tradename Registration is $55 and is a nice alternative to changing your company name, which requires an amendment to the Certificate of Organization.
Foreign LLCs that are established in other state jurisdictions may be required to register in the District if they are considered “doing business” in D.C. Your company is considered “doing business” if it holds itself out to the public as conducting business in the District operating under protection of its laws. Merely having an employee living in D.C., having a bank account or holding an occasional meeting here would not constitute engaging in business. Defending a legal action does not mean you are doing business, though a foreign entity doing business in the District may not commence a legal action here unless it is registered to do business.
After your company has been established, you may need to apply for a business license depending on your service offered. Generally, self-employed consultants do not need a basic business license. You will also need a tax employer identification number (EIN) from the IRS and may need to register with the District’s Office of Tax and Revenue prior to filing any business tax returns.
Before establishing your LLC or other business entity in the District, you are encouraged to consult a D.C. Tax Attorney to discuss your options. Choice of business entity, State of business registration, Residency of the owners, Licensing and Tax considerations should all be discussed prior to taking any action.
DC Sales Taxes
Under D.C. Code, a sales tax is imposed upon all vendors for the privilege of making a “retail sale” or “sale at retail” of tangible personal property and certain selected enumerated services. A corresponding use tax is imposed on the use, storage, or consumption of any tangible personal property and service sold or purchased at retail.
Business owners who perform certain services in the District should be aware that taxable services includes security services, employment services, real property maintenance, data processing and information services. Sales for resale are specifically exempt from the definition of retail sales, however the sales for resale exemption only applies to tangible personal property and not to services.
The sale of or charges for digital goods are now included in the definition of retail sale. Digital goods includes digital audiovisual works, digital audio works, digital books, digital codes, digital applications and games, and any other otherwise taxable tangible personal property electronically or digitally delivered, streamed or accessed and whether purchased singly, by subscription or in any other manner, including maintenance, updates and support.
Under long established law set by the U.S. Supreme Court, sellers without a physical presence in a jurisdiction were not required to collect and remit sales tax to that jurisdiction. In 2018, the Court overturned the previous decision by issuing an opinion in South Dakota v. Wayfair, which held that such physical presence in a jurisdiction is not required for sellers to be obligated to collect and remit sales taxes to that jurisdiction.
Accordingly, the District has enacted recent legislation (Internet Sales Tax Emergency Amendment Act) which requires sellers without a physical presence in the District to collect and remit sales tax if they will have 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. Additionally, the legislation requires marketplace facilitators (who provide a marketplace that lists, advertises, stores, or processes orders for retail sales) to collect and remit to the District sales tax on sales made on their marketplace.
Real Property Taxes
In the District, real property is taxed based on classifications of similar use, with properties in different classes taxed at different rates. Rates are established by the Council of the District of Columbia and are subject to change. The amount of tax due is determined by dividing the assessed value of the property by $100, and then multiplying that amount by the applicable tax rate for the property. Residential property is under the Class 1 tax rate, which is $0.85. If your house is assessed at $625,000, divide $625,000 by 100 (that amount is $6,250), then multiply $0.85 by $6,250, for an annual tax of $5,312. This amount can be reduced by the Homestead deduction.
The Homestead deduction benefit reduces your real property’s assessed value by $75,700, which equates to a savings of over $643. To qualify, an individual must be domiciled in the District and own and occupy the home as their principal place of residence in the District. In order to claim the deduction, the taxpayer must file an application with the Office of Tax and Revenue. Similarly, if the property ceases to become the individual’s primary residence (or there is a change in domicile), a cancellation form must be filed. Penalties for non-compliance can be severe.
Domicile is the place where an individual has their true permanent home or habitation, without any fixed or definite intent of abandonment, and to which the individual has the present intention of returning, after any absence regardless of the length. An individual can have more than one home or residence, but he can have only one domicile. Domicile, once established, is presumed to continue until shown to have been changed. To establish domicile in the District, persons who move into the District from other states must show clearly and unequivocally physical presence in the District and intent to abandon the former domicile and remain in the District for an indefinite period.
The Office of Tax and Revenue is conducting ongoing audits of properties located in the District that have in the past or are currently benefiting from the owner-occupied Homestead deduction. If an individual begins to rent his property out in lieu of selling it, care should be given to cancelling the Homestead benefit. Taxpayer must complete a Homestead cancellation form, and notify the Office of Tax and Revenue, in writing, within 30 days of the date that he moves from the property.
If you are determined not to qualify for the Homestead deduction, Penalties are assessed at 10 percent of the deduction amount and interest at 18 percent per year on the balance due. Reclaiming an undue benefit can quickly add up to tens of thousands of dollars over time. However, OTR may waive penalties and interest for good cause where equity demands. If you are a taxpayer who is claiming the Homestead deduction in error, contact a District of Columbia Tax Attorney to discuss your options.