FAQ: What the millionaires’ tax means for Seattle founders, investors, and tech workers

Washington state lawmakers last week approved what’s known as a “millionaire tax,” a significant change in a state that has long been a tax-friendly haven for entrepreneurs and high earners.

GeekWire spoke with legal experts and wealth advisors to learn more about how the tax could affect different people in Washington’s tech ecosystem. Here’s what we learned.

[Editor’s Note: This article is intended to provide general information and should not be relied on as legal or tax guidance. Readers should consult their own legal and tax advisors about their individual circumstances.]

What does the tax do?

SB 6346 imposes a 9.9% tax on Washington taxable income over $1 million. It will come into effect on Jan. 1, 2028 — if it survives a similar legal battle. Washington is one of the few states that does not have a comprehensive personal income tax, relying instead on sales, property, and business taxes.

How many people does it affect?

The tax is estimated to affect 20,000 to 30,000 Washington households, or less than 1% of the state’s total population. It adds to Washington’s capital gains tax that went into effect in 2022.

Are people already leaving because of it?

“There’s no question that people in Washington are leaving, and they’re citing taxes as a primary motivation,” said Steven Schindler, a principal at Everbridge Law Group, which advises clients on trusts and estate planning. He added: “Whether the size will register on the economic radar in general – it’s hard to say.”

Marc Barros, the longtime CEO of Seattle Startup Moment, said last week that he is moving his company to Wyoming.

But Madhu Singh, a chief legal officer at Foundry Law Group who works closely with Seattle-area companies, said he doesn’t see a slowdown in startup activity. “Every day I talk to new founders, I start new companies, I build things,” he said.

Singh said the tax could have a big impact on compensation negotiations, as founders and employees weigh salaries more closely and think more carefully about when income is recognized.

How can RSUs affect a technical employee?

An Amazon or Microsoft employee with a big compensation package — base salary and restricted stock units, or RSUs — could find themselves above the average $1 million in take-home income in a solid buying year. When the RSUs vest, that income appears on the W-2 and flows directly into the corporation’s adjusted gross income in the year of grant, making it subject to the new tax.

For some employees who have options instead of RSUs, the 2028 start date could create more room for timing decisions when income is recognized, said Tim Steffen, director of advanced planning at Baird.

The $1 million standard deduction will adjust for inflation, beginning with taxes due in 2030.

What about a married couple where both partners work in technology?

The $1 million limit effectively applies at the household level to spouses and registered domestic partners. Two people each earning $600,000 — below the threshold each — would face a combined income of $1.2 million, put $200,000 in the taxable bracket and generate about $20,000 in federal income, assuming no other adjustments or deductions.

Seattle startup attorney Joe Wallin, who opposed the bill and testified against related legislation during the session, called it “a real problem for two-income couples, tech executives and business owners in Washington.”

What happens when a startup founder goes big?

A founder spends years building on a small salary and then sells his company to get out big. Will they – and their co-workers – owe millions in new taxes?

There is an important twist: whether their stock qualifies as Qualified Small Business Stock, or QSBS, under Section 1202 of the federal tax code.

QSBS is a long-standing corporate incentive designed to reward startup risk and finance young companies. Founders, early employees, and investors can deduct up to 100% of qualified gains from capital gains taxes if they meet strict requirements, including holding the stock for at least five years and the company meeting state asset limits at the time the stock is issued. Exemptions are generally limited to $15 million or 10 times the taxpayer’s adjusted basis in the stock, for stock issued after July 4, 2025.

Because SB 6346 starts its calculation from the corporation’s adjusted gross income — profits that are not counted at the federal level never enter the state tax base — a founder who qualifies for the QSBS exemption should not owe new Washington taxes on those profits, either.

“The bottom line for founders selling stock: if you sell QSBS and the gain is deductible under Section 1202, that gain should not be subject to Washington’s million dollar tax,” Wallin wrote in his blog post about the new tax.

Can that QSBS protection go away?

SB 6229, a bill proposed in Washington that would strip QSBS protections at the state level, failed to advance this session.

“It would be a potentially huge policy shift, a potential outcome that would accelerate the movement of founders and business owners faster than a millionaire’s tax,” Schindler said.

A similar QSBS-related bill passed Oregon last month, drawing criticism from tech leaders and investors.

What about angel investors and VCs?

For investors, the question of QSBS is equally important. Investments in qualified C corporations held for at least five years and meeting the requirements of Section 1202 must generate dividends that remain outside the Washington tax base. But investing in LLCs, partnerships, or C corporations that don’t meet those requirements is a different matter.

“This makes QSBS’s qualification analysis even more important to Washington-based angel investors,” Wallin said.

How does the tax affect pass-through business owners?

The new tax is technically an individual income tax — but for owners of LLCs, S corporations, partnerships, and sole proprietorships, business income flows directly onto their tax returns. If their share of business income, combined with other Washington taxable income, pushes them over the limit, they can owe.

How much depends on the building and ownership. Steffen gave an example: three equal partners in a business generating $10 million in annual revenue would each report an income of approximately $3.3 million – above the limit. Twenty equal partners in the same business can each report $500,000 – less.

Wrinkle: even if the business keeps its cash and does not distribute it, the income is still taxable to the owner. “It’s often called phantom income,” Steffen said. “It’s income that you have to pay taxes on, but you didn’t see the money.”

SB 6346 also creates a pass-through business tax election, giving some Washington businesses a new way to pay taxes at the corporate level rather than sole proprietorships. In some cases, that can allow business owners to deduct state taxes paid at the federal level, although the benefit can vary depending on each owner’s tax situation.

Does the tax include any small business breaks?

The legislation increases the annual threshold for B&O tax filings from $125,000 to $250,000. It also increases the B&O credit for small businesses – the amount varies depending on the type of business – reducing the tax burden on some small firms.

For business owners subject to both taxes, the bill also provides a credit for certain B&O and public utility taxes against the new income tax.

What about founders with large non-QSBS exits?

For founders with large non-QSBS outlets, the picture is more complicated. Washington has an existing tax of 7% on capital gains over the standard deduction limit (currently $278,000), and 9.9% on gains over $1 million. SB 6346 includes a credit intended to prevent direct double taxation of similar benefits.

What about legal challenges?

Washington courts have long treated income as property under the state constitution, meaning any broad income tax would face strict uniformity requirements — one reason SB 6346 is expected to face a legal challenge. A capital gains tax that took effect in 2022 survived its own court battle after the country’s Supreme Court ruled that it was a property tax, not an income tax. SB 6346 is clearly framed as an income tax, which would make it more vulnerable to challenge.

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