Taxation of Corporate Director Fees
Posted on July 6, 2017 by Andrew Goodrich
A Special Notice, dated May 24, 2017, from the Washington State Department of Revenue has provided further clarification regarding Business & Occupation (“B&O”) tax and corporate director fees earned within and without the state of Washington. The Notice makes it clear that compensation received for services rendered as a corporate director may be subject to Washington B&O tax, if the director has sufficient ties to the state. Although this particular Notice was just released, B&O tax has applied to this type of compensation received effective as of July 1, 2010.
The Department of Revenue has taken a very broad position with respect to what is includable in the calculation of total compensation: not only cash payments, but also stock options (granted after July 1, 2010), property received, awards and bonuses, as well as reimbursable expenses related to the services provided, including telephone costs and travel expenses. However, a director who also serves as an employee of the company is subject to tax only with respect to the compensation allocable to services performed in the role of a director. Compensation received in their capacity as an employee is exempt.
Even corporate directors serving on boards of Washington-based companies who are not otherwise residents of Washington may be subject to this tax. If an individual has “substantial nexus” to Washington, that individual may owe B&O tax to the state for any director fees. More information regarding economic nexus in this context can be found on the Department of Revenue website at http://dor.wa.gov/docs/pubs/specialnotices/2017/sn_17_directorfees.pdf. Nevetheless, if a director has a taxable presence in another state, he or she may be able to apportion their director compensation among multiple states.
Finally, the state has exempted from registration those directors whose income from all B&O activities is less than $12,000 per year and who are not required to otherwise register with—or pay fees or taxes to—the Department of Revenue.
The bottom line is that many corporate directors may be exempt from the registration requirement if their corporate fee compensation is minimal. However, larger companies should be aware of this requirement and work with their directors to ensure they are properly reporting any income. The business group at Lasher Holzapfel Sperry & Ebberson can assist with any questions that you may have.