New Payroll Tax in Washington StateSubmitted by Kaizen Financial Advisors, LLC on May 21st, 2021
The “Washington State Long-Term Care Trust Act” ( House Bill 1323 ) should be on your radar. This is the nation’s first public state-operated Long-Term Care Insurance program. The law mandates long-term care benefits for Washington residents, paid for by a tax on employees’ wages. The intention is to have the tax cover long-term care expenses incurred by the state.
Under the current law, you have one opportunity to opt-out of Washington State’s income tax by having a long-term care insurance policy in place by November 1st, 2021. Most LTC insurance specialists are requesting applications as soon as possible to ensure policies can but in place in advance of the November deadline. With the sense of urgency of this upcoming deadline, we wanted to circulate this article a second time in case you missed it.
Washington State’s New Income Tax Details:
- This is a Washington State payroll tax imposed on WA State wage earners beginning Jan 1st 2022.
- Tax will be assessed on W-2 income at a flat rate of 0.58%. Investment income will NOT be taxed.
- The 0.58% tax rate can increase over time.
- There is no cap on income level subject to the tax. All wages, including stock-based compensation, bonuses, severance pay, and paid time off, are subject to this tax.
What the New Tax Intends to Provide:
- Washington State residents will be eligible for a small amount of long-term care (LTC) benefits.
- The maximum benefit per individual is up to $100/day or a lifetime limit of $36,500 (inflation adjusted)
- Benefits can only be used within the state of Washington.
Keep in Mind there are Washington Residents who are Automatically Exempted From this Tax:
- Self-Employed Individuals.
- Employees of a Federally recognized Tribe.
- Certain collectively bargained employees.
- Do nothing if you are comfortable paying the tax.
- Procure a long-term care policy to exempt yourself from the payroll tax.
- Contact your HR department to see if they will be offering a group LTC plan that would exempt you from paying the tax.
- If you already have an LTC policy, then you can request an exemption.
- Employees who attest that they have a long-term care policy will be exempted from the payroll tax and will not be eligible for the Washington State LTC benefit.
- To be exempted from the tax you will have to provide proof of your LTC policy to the Employment Security Department.
If You Wish to Opt Out of the Tax and thus the Benefit:
- You can permanently exempt yourself from the tax if you are 18 or older and own a qualified Long-Term Care insurance policy.
- The LTC insurance policy needs to be purchased and in place as of Nov 1st, 2021. (RCW 50B.04.080)
- The Employment Security Department will accept applications for exemption from October 1,2021 through December 31, 2022.
- The exemption is a one-time process that lasts your lifetime.
- Once exempted by the Employment Security Department, it is your responsibility to provide the exemption certificate to your current and all future employers.
- The ramification of exempting yourself is your permanent (lifetime) removal from the State’s new LTC plan.
When an Exemption Makes Sense:
- If you plan on moving out of the State of Washington, including working years outside the state or retiring in another state - will be taxed but not qualify for the benefit.
- Individuals who work less than 500 hours per year – will be taxed and not qualify for the benefit
- High-income earners – will be taxed more than the LTC benefit will pay out.
- Individuals who will not be working a total of ten years without interruption of five or more consecutive years – will pay tax and not qualify for benefit.
- Individuals within a few years of retirement – will pay tax and not qualify for the benefit.
- Individuals who are starting their working careers – will be taxed more than the benefit pays out.
- Self-employed individuals who are considering returning to work for another company where they would be a W2 employee.
What Kaizen is Doing for our Clients:
- We are preparing to help facilitate LTC insurance applications for clients who wish to exempt themselves from this new tax.
- If your only interest is to obtain the smallest/least expensive policy in order to satisfy the exemption requirement, please let us know. If you desire a more robust policy, we would be happy to help with that as well, although it may take more time to analyze.
- There will be many people applying for new LTC policies. We will be doing everything we can to meet your needs as we move forward.
This is a new tax with a short window to opt out. We are working quickly on a strategy for clients. We will reach out by the end of the month with your options and our recommendations. Stay tuned!