As stated in earlier posts, Washington has enacted several changes recently. One of those changes or clarifications is the taxation of board of director compensation.
Sec. 701 of SB 6143 clarifies that amounts received by an individual from a corporation as compensation for serving as a member of the corporation's board of directors are subject to B&O tax under the services classification.
Employee Exemption Does Not Apply to Independent Contractors
One of the major business and occupation tax exemptions is provided in RCW 82.04.360 for income earned as an employee or servant as distinguished from income earned as an independent contractor. The legislature's intent in providing this exemption was to exempt employee wages from the business and occupation tax, but not to exempt income earned as an independent contractor. The legislature finds that corporate directors are not employees or servants of the corporation whose board they serve on, and therefore, are not entitled to a business and occupation tax exemption under RCW 82.04.360.
Tax on Director, NOT Company
Therefore, beginning July 1, 2010, compensation paid to board of directors will be subject to the Washington Business and Occupation (B&O) Tax. The tax is imposed on the board of director and not the company or payor.
Director Subject to Economic Nexus Standard
Board of directors will be subject to the new economic nexus standards enacted on June 1, 2010. Therefore, the director will be deemed to have "substantial nexus" if it has more than $50,000 of property in the state, more than $50,000 of payroll in the state, and more than $250,000 of receipts from the state, OR at least 25% of the person's total property, total payroll or total receipts is in the state.
Sourcing Based on Where Benefit Derived
The sourcing of the compensation will be under the new sourcing rules for services which hold that the income should be sourced to where the benefit of the service is derived. Sourcing is always an issue of debate, however, it is most likely that the benefit will be determined to be primarily received by the corporation's headquarters, not where the board of directors hold their meetings.
If you have any clients who are board of directors of Washington based companies, please contact me at [email protected] for assistance in determining how this change will impact their tax situation.
For more information, go to Washington Director Fees Special Notice.