United States

Seattle enacts new payroll expense tax effective in 2021

TAX ALERT  | 

In early July, the Seattle City Council passed a payroll expense tax on certain businesses operating within Seattle city limits expected to raise over $200 million annually. Seattle Mayor Jenny Durkan recently returned the bill to the council unsigned, allowing the tax to become law.

Seattle’s payroll expense tax will be imposed beginning Jan. 1, 2021 on businesses with at least $7 million of Seattle-sourced payroll expenses in the previous calendar year. For these qualifying businesses, a payroll expense tax will be levied on the compensation of employees, including independent contractors, earning $150,000 or more. Compensation is considered remuneration as defined in the state’s family and medical leave statutes, net distributions, or incentive payments, including guaranteed payments. Compensation excludes payments to an owner of a pass-through entity that are not earned for services rendered or work performed, such as return of capital, investment income, or other income from passive activities.

The rate of tax is tier-based and dependent on a business’ Seattle-sourced payroll expense:

  • For businesses with payroll expenses of at least $7 million and less than $100 million, payroll will be taxed at 0.7% for employees with annual compensation at least $150,000 and less than $400,000. Payroll will be taxed at 1.7% for employees with annual compensation of at least $400,000
  • For businesses with payroll expenses of at least $100 million and less than $1 billion, payroll will be taxed at 0.7% for employees with annual compensation of at least $150,000 and less than $400,000. Payroll will be taxed at 1.9% for employees with annual compensation of at least $400,000
  • For businesses with payroll expenses of at least $1 billion, payroll will be taxed at 1.4% for employees with annual compensation of at least $150,000 and less than $400,000. Payroll will be taxed at 2.4% for employees with annual compensation of at least $400,000

Per the ordinance, employee compensation is paid in Seattle when 1) the employee is primarily assigned to a Seattle business location, 2) the employee is not primarily assigned to any place of business but performs at least 50% of their service in Seattle, or 3) the employee is not primarily assigned to any place of business and does not perform at least 50% of their service in Seattle, but resides in Seattle. The legislation also provides for apportionment in certain situations.  

Grocery businesses are fully exempt from Seattle’s payroll expense tax, and nonprofit healthcare entities are exempt through Dec. 31, 2023 with respect to employees with annual compensation of at least $150,000 and less than $400,000. 

The payroll expense tax for 2021 will be due on Jan. 31, 2022, and all subsequent periods must be filed on a quarterly basis.

Takeaways

In 2018, Seattle passed a “head tax” on certain businesses making over $20 million per year. That tax was quickly repealed after extensive criticism from both the business community and city residents. In 2017, the city passed a “high-earner income” tax that was ultimately determined to be unconstitutional in 2019. The payroll tax has also received some push-back. In returning the bill to council, Mayor Durkan expressed her concerns with the legality and the scale of the tax, especially during the COVID-19 pandemic. 

Taxpayers with payroll in Seattle should meet with their tax advisor to determine potential new payroll tax obligations beginning in 2021 and discuss prospective planning opportunities. 

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