Social Housing Tax
The Social Housing Tax imposes a payroll expense tax of 5% on ‘excess compensation’ or annual compensation over $1 million paid to any employee working in Seattle. Compensation is considered paid in Seattle when made to an employee that is primarily assigned to a location within city limits. The term ‘primarily assigned’ is defined as the business location of the company where the employee performs his or her duties. Therefore, compensation paid to any employee who is assigned to business location within Seattle may be subject to the tax. Like the payroll expense tax, the Social Housing Tax is employer-paid. Employers are prohibited from deducting the tax from compensation paid to employees.
For the 2025 tax year, employers subject to the Social Housing Tax will file returns and remit taxes by Jan. 31, 2026. For subsequent years, businesses will file and pay taxes on a quarterly basis similar to the payroll expense tax. Not all employers operating in Seattle will be subject to the tax. Certain businesses are preempted from taxation pursuant to federal or state laws, such as federal and state government agencies and local governmental entities, independent contractors for purposes of the business license tax and whose excess compensation is included in the tax paid by another business, as well as insurance businesses and their agents, business that only sell, manufacture, or distribute motor vehicle fuel, and businesses that only distribute or sell liquor.
Payroll expense tax
The payroll expense tax is imposed on compensation in excess of $150,000, adjusted for inflation, paid to Seattle-based employees effective from Jan. 1, 2021, through Dec. 31, 2040. For 2025, the inflation adjusted minimum compensation is $189,371. The tax is based on total combined payroll expense and individual annual compensation. The tax rate can be as high as 2.557% for annual compensation over $504,989 for a business with total payroll expense of $1,262,471,758 or greater.
Takeaways
Businesses with Seattle-based employees among all industries, including nonprofits, earning over $1 million should evaluate the potential implications of the Social Housing Tax and how it will affect future business operations. Employers with significant payroll expense could be subject to both taxes on compensation paid to high earners, including a 2.557% payroll expense tax on compensation up to $1 million, and a combined 7.557% payroll expense and Social Housing Tax on compensation over $1 million.
Some cities and localities have struggled with revenue due to post-pandemic factors like reduced office space and hybrid work and slow tourism recovery. Reduced local revenues from fewer workers soliciting restaurants, commuting to offices, using public transportation, and holding happy hours have caused localities to consider novel means to increase revenue.
Taxpayers with questions about local taxation, including local payroll taxes, should reach out to their state and local tax and employment tax advisors.
