Seattle approves new payroll expense tax


The Seattle City Council recently approved a new payroll expense tax, which will apply to businesses operating in Seattle with at least $7 million in annual payroll at a rate of 0.7% -1.4% on employee salaries over $150,000 beginning on Jan. 1, 2021.1 While the so-called “JumpStart tax” is currently awaiting signature by Seattle Mayor Jenny Durkan, the City Council passed the legislation by margin of 7-2, rendering it veto-proof.






The JumpStart tax marks the latest attempt by the Seattle City Council to create a new source of revenue, after failed attempts over the past two years to enact an income tax and a payroll headcount tax, both of which drew widespread public opposition.2 The new tax is intended to replenish an estimated $86 million of Seattle’s Emergency Management Fund and Revenue Stabilization Fund which have been depleted in response to the COVID-19 pandemic, as well as raise revenue to be used in combating affordable housing and homelessness. According to estimates, the JumpStart tax is expected to generate approximately $173.5 million annually.3




Payroll expense tax


Beginning Jan. 1, 2021, the Seattle payroll expense tax is imposed using a three-tier structure determined by annual business revenue and level of employee compensation.4

Companies with annual payroll of at least $7 million
  • 0.7% tax on the payroll of employees with annual compensation between $150,000 - $399,999
  • 1.7% tax on the payroll of employees with annual compensation of $400,000 or more


Companies with annual payroll of at least $100 million
  • 0.7% tax on the payroll of employees with annual compensation between $150,000 - $399,999
  • 1.9% tax on the payroll of employees with annual compensation of $400,000 or more


Companies with annual payroll of at least $1 billion
  • 1.4% tax on the payroll of employees with annual compensation between $150,000 - $399,999
  • 2.4% tax on the payroll of employees with annual compensation over $400,000

For purposes of the tax, the term “compensation” means “remuneration as that term is defined in RCW 50A.05.010, net distributions, or incentive payments, including guaranteed payments, whether based on profits or otherwise, earned for services rendered or worked performed, whether paid directly or through an agent, and whether in cash or in property or the right to receive property.”5 Compensation does not include “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.”6

The term “employee” means “any individual who performs work, labor, or personal services of any nature for compensation paid by a business,” including members of limited liability companies and professional limited liability companies, other owners of pass-through entities, sole proprietors, and independent contractors.7

The term “payroll expense” is defined as the “compensation paid in Seattle to employees.”8 Specifically, compensation is considered paid to an employee in Seattle if any of the following three requirements are met:

  1. the employee is “primarily assigned” within Seattle;
  2. the employee performs 50% or more of their service in Seattle; or
  3. the employee does not perform 50% or more of their service in any city, and the employee resides in Seattle.9

For these purposes, “primarily assigned” means “the business location of the taxpayer where the employee performs their duties.”10 It is also worth noting that businesses that use temporary or contracted employees are required to report and pay the tax on the payroll expense of the temporary or contracted employees, regardless of whether they are referred from an employment agency.11




Exemptions and deductions


The payroll expense tax does not apply to businesses with less than $7 million in annual payroll.12 Further, the following businesses are also exempt: grocery stores, independent contractors whose compensation is included in the payroll expense of another business that is subject to the payroll expense tax, and businesses pre-empted from taxation by cities pursuant to federal or state law, including government agencies, insurance companies, business that only distribute or sell liquor, and businesses that only sell, manufacture, or distribute motor vehicle fuel.13 In addition, from January 1, 2021 through December 31, 2023, non-profit healthcare entities may deduct from the measure of the tax the payroll expense of employees with annual compensation of $150,000 to $399,999.14




Allocation and apportionment


As a means to efficiently allocate and apportion the JumpStart Tax, taxpayers that have payroll expenses consisting of work done and services provided both within and outside Seattle may be allowed to “use a representative test period or conduct a survey based on factual data to arrive at a formula with which to calculate the percentage of payroll expense attributable to Seattle.”15 Any formula will be subject to review and correction. In addition, if the payroll expense does not fairly represent the extent of compensation paid to employees that is attributed to work performed or services rendered in Seattle, the taxpayer may petition or the Director may require the use of another method to effectuate an equitable allocation and apportionment.16




Due dates, rates, and expiration


The payroll expense tax for 2021 tax year will be due and payable on January 31, 2022 (i.e., the same date that the Seattle business license tax payment for the fourth quarter of 2021 is due).17 After the initial 2021 payroll expense tax filing and payment, the tax will be due and payable on a quarterly basis, unless a business is assigned to an annual reporting period by the Director.18 The payroll expense tax rate will be increased on January 1 every year beginning in 2022 at a rate commensurate with the growth rate of the prior year’s consumer price index for the Seattle, Tacoma, and Bellevue area.19

The payroll expense tax is set to expire Dec. 31, 2040.20






Similar to the previous tax initiatives sought by the Seattle City Council, such as the income tax and the payroll headcount tax, the JumpStart tax has also drawn strong criticism from the Seattle business community. While publicly touted as a tax on large businesses, the payroll expense tax will undoubtedly impact smaller business as well due to the relatively low $7 million annual payroll threshold. It also raises questions as to unintended consequences, such as whether it will create an incentive for businesses to keep their employees’ pay below the various thresholds. Furthermore, due to the changes in work environments created in response to the COVID-19 pandemic, the payroll expense tax could become difficult to administer with many companies still operating in temporary remote work environments or transitioning to a permanent hybrid of in-person and remote workforces. Early unofficial guidance from Seattle indicates possible interpretation of the “primarily assigned” definition to conclude that the tax applies based on wages paid to employees temporarily working from their Seattle residences rather than their assigned offices outside Seattle. Impacted companies anticipating application of the apportionment provisions should consider implementing new processes to document and/or survey employee work locations. The combination of the current remote work environment with enactment of the payroll expense tax through 2040 could lead businesses to hire remote employees located outside Seattle or consider relocating entirely outside of the city.

1 Seattle Council Bill 119810 (Jul. 6, 2020). Enacting Municipal Code § 5.38.
2 An employee hours tax was enacted, then quickly repealed. Ordinance 125592, repealing Ordinance 125578. Mayor Durkan signed the ordinance on June 13, 2018.
3 Fiscal Note, Seattle Council Bill 119810.
4 Seattle Municipal Code § 5.38.030(B).
5 Seattle Municipal Code § 5.38.020. It should be noted that RCW § 50A.05.010(19)(a), contained in Washington’s family and medical leave program act, defines remuneration as “all compensation paid for personal services including commissions and bonuses and the cash value of all compensation paid in any medium other than cash.”
6 Id.
7 Id.
8 Id.
9 Id.
10 Id.
11 Seattle Municipal Code § 5.38.050(D).
12 Seattle Municipal Code § 5.38.040.
13 Id.
14 Seattle Municipal Code § 5.38.045.
15 Seattle Municipal Code § 5.38.050(A).
16 Seattle Municipal Code § 5.38.050(B).
17 Seattle Municipal Code § 5.38.060.
18 Id.
19 Seattle Municipal Code § 5.38.070.
20 Seattle Municipal Code § 5.38.120.





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