Seattle Payroll Tax Effective January 1, 2021

Seattle Payroll Tax Effective January 1, 2021 – Shannon & Associates CPAs

On July 6, 2020, the Seattle City Council passed Council Bill (CB) 119810 implementing a variable-rate payroll tax or ‘payroll expense tax’ that applies to businesses with $7 million or more of payroll expense in the most recent calendar year. The tax is intended to assist with the affordable housing crisis, homelessness, and now the COVID-19 pandemic.

Mayor Jenny Durkan is concerned the tax may ultimately have a detrimental impact on the City of Seattle, its businesses, and workers and did not support the bill. The bill was returned unsigned by Mayor Durkan but became law regardless on July 17 due to its passage with a veto-proof margin. The tax applies from January 1, 2020 to December 31, 2040.

The tax is imposed on the ‘payroll expense’ of each person/employee engaging in business within Seattle and applies to those with annual compensation in excess of $150,000. The tax is computed using the following variable rates & thresholds:

  • Businesses with payroll expense between $7 million and $100 million
    • 0.7% of the payroll expense for employees with annual compensation between $150-$400 thousand
    • 1.7% of the payroll expense for employees with annual compensation exceeding $400 thousand
  • Businesses with payroll expense between $100 million and $1 billion
    • 0.7% of the payroll expense for employees with annual compensation between $150-$400 thousand
    • 1.9% of the payroll expense for employees with annual compensation exceeding $400 thousand
  • Businesses with payroll expense exceeding $1 billion
    • 1.4% of the payroll expense for employees with annual compensation between $150-$400 thousand
    • 2.4% of the payroll expense for employees with annual compensation exceeding $400 thousand

The tax base, payroll expense means compensation paid in Seattle to employees. An employee may be deemed as ‘paid in Seattle’ if they are 1.) primarily assigned within Seattle, 2.) not primarily assigned to any place/city, but perform more than 50% of their services within Seattle during the tax period, or 3.) not primarily assigned to any place, not performing more than 50% of services in any city, but is a Seattle resident. 

Businesses/taxpayers should closely monitor and document where their employees are performing services to determine which employees the tax applies to for those who perform work both within and outside of Seattle. Additionally, it currently remains unclear how remote employees will be treated for purposes of the tax, so it is suggested that documentation of assignment locations for workers is maintained going forward.

The Seattle payroll tax will be due and payable on a quarterly basis similar to other taxes under the Seattle Municipal Code. However, tax for the initial implementation year 2021, is not due until January 31, 2022. There is a possibility that additional reporting frequencies (annual, quarterly, monthly) may be adopted.

Please contact us with any questions or concerns.

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