The Law at a Glance

Here is what Senate Bill 6346 establishes:

• Tax rate: 9.9% flat rate on Washington taxable income above $1 million per household
• Effective date: January 1, 2028 — first returns and payments due in 2029
• Starting point: Federal adjusted gross income (AGI), with Washington-specific modifications
• Standard deduction: $1 million per household (indexed for inflation), effectively meaning the tax applies only to income above that threshold
• Who it reaches: Washington residents, part-year residents, and nonresidents with Washington-source income — including wages, pass-through entity income, investment income, and business income connected to the state
• PTET election: Partnerships, LLCs taxed as partnerships, and S corporations may elect to pay the tax at the entity level on behalf of qualifying owners, with estimated payments beginning July 2029
• Estimated payments: Required when annual tax liability exceeds $5,000, generally following the federal estimated tax framework

Who Is Actually Affected?

Legislative estimates project the tax will affect approximately 20,000 to 30,000 Washington households and generate more than $3 billion annually in state revenue. Governor Ferguson noted the tax applies to less than 0.5% of Washington residents.

For business owners, the picture is more nuanced. Consider that the $1 million threshold is a household-level concept, not an entity-level one. Business owners receiving distributions, salaries, or pass-through income from S corporations, partnerships, or LLCs may find their personal Washington AGI crossing the threshold even if no single income stream does on its own. Capital gains above $1 million are already subject to Washington’s existing 9.9% capital gains rate — so affected taxpayers should now factor in combined exposure from both taxes.

Legal Challenges: A Real Variable, Not a Planning Strategy

The law will face legal challenges. The Citizen Action Defense Fund has announced it is prepared to file suit, arguing the tax violates Washington’s constitution, which has historically treated income as property subject to a uniformity requirement. The Washington State Republican Party is also pursuing a voter repeal initiative targeting the November 2026 ballot, which would require more than 300,000 valid signatures by July 2.

However, waiting on litigation or initiative outcomes is not a substitute for proactive planning. Washington’s capital gains tax followed a similar legal arc and ultimately survived. Prudent planning prepares for the law as written while remaining adaptable.

The Planning Window: 2026–2027

Nearly two years separate today from the January 1, 2028 effective date. That window matters. Decisions made now — about entity structure, compensation design, investment timing, residency, and pass-through entity tax elections — will shape liability outcomes for years. Decisions deferred until late 2027 will be reactive rather than strategic.

Key planning areas to evaluate now include:

• Entity structure review: How your business is taxed at the entity level affects how income flows to your personal return. The new PTET election creates flexibility worth modeling carefully.
• Compensation and distribution timing: Depending on your income profile, the timing and structure of compensation, bonuses, and distributions across 2027 and 2028 may be material.
• Investment income coordination: The interaction between Washington’s existing capital gains tax and the new millionaires’ tax means that gains above $1 million may be subject to both — a point requiring coordinated analysis.
• Residency considerations: Nonresidents with Washington-source income are subject to the tax. Residents considering relocation need to understand what “part-year resident” rules mean for their specific income profile.
• Estimated payment planning: Once the tax is in effect, underpayment penalties begin. Getting ahead of the payment schedule avoids unnecessary costs.

Washington’s Broader Tax Environment

The millionaires’ tax does not exist in isolation. Washington’s tax landscape has been shifting meaningfully: the capital gains tax enacted in 2021 (with rates increased in 2025 for gains over $1 million), and now SB 6346. On the other side of the ledger, Senate Bill 6347 — also passed in March 2026 — reverts Washington’s estate tax rates to pre-2025 levels, reducing the top rate from 35% back to 20% for decedents dying on or after July 1, 2026.

Navigating this environment requires understanding how these taxes interact — not treating each in isolation.

The Bottom Line for High-Income Business Owners

The law is in place. The 2028 effective date is not distant — it is two planning cycles away. The business owners who will be best positioned are those who engage in coordinated, proactive planning grounded in their actual income profile and long-term objectives, not those who wait for legal outcomes or assume the landscape will revert.

At Caro & Associates, we work with service-based business owners on exactly this kind of planning — connecting the dots between entity structure, tax strategy, cash flow, and long-term financial objectives. If your income approaches or exceeds the $1 million threshold, now is the right time to start the conversation.

Ready to get ahead of this? Contact us to schedule a planning conversation.