Imposition of Seattle Payroll Tax Set to Begin in 2021

The State of Washington does not have a corporate income tax.

However, Seattle has enacted a payroll expense tax, with imposition of the tax beginning on January 1, 2021.

The payroll tax is generally due and payable on a quarterly basis, but the tax due for 2021 will be payable on the same date that the tax payment is due for the 4th quarter of 2021 (i.e., January 31, 2022). In addition, some businesses may be assigned an annual reporting period.

The tax is set to expire after December 31, 2040.

The provisions of the payroll tax are contained in Chapter 5.38 of the Seattle Municipal Code.

Employers Subject to Tax

The tax is imposed on every business that had $7 million or more in Seattle-based payroll for the prior calendar year. In addition, in order to be subject to the tax, a business must have employees with current-year annual compensation of at least $150,000.

Exemptions from the tax are allowed for grocery businesses and also for businesses that are preempted from city taxation because of federal or state laws, including: insurance businesses; businesses that only sell, manufacture, or distribute motor vehicle fuel; businesses that only distribute or sell liquor; and federal, state, and local government entities.

Rates

The applicable rates of the payroll tax are based on two things: (1) the amount of the employer’s annual Seattle-based payroll expense; and (2) the amount of annual employee compensation of at least $150,000.

For businesses with payroll expense of less than $100 million, the rate is:

  • 0.7% of the payroll expense of employees with annual compensation of $150,000 to $399,999.99; and
  • 1.7% of the payroll expense of employees with annual compensation of $400,000 or more.

For businesses with payroll expense of $100 million or more, but less than $1 billion, the rate is:

  • 0.7% of the payroll expense of employees with annual compensation of $150,000 to $399,999.99; and
  • 1.9% of the payroll expense of employees with annual compensation of $400,000 or more.

For businesses with payroll expense of $1 billion or more, the rate is:

  • 1.4% of the payroll expense of employees with annual compensation of $150,000 to $399,999.99; and
  • 2.4% of the payroll expense of employees with annual compensation of $400,000 or more.

Businesses are not allowed to make any deductions from employees’ compensation in order to pay for the tax.

Legal Challenge Filed

The Seattle Metropolitan Chamber of Commerce has filed a lawsuit seeking to declare the tax invalid (No. 20-2-17576-5 SEA, Wash. Super. Ct., King County), asserting that the city unlawfully imposed an unconstitutional tax on the right to earn a living. The complaint was filed on December 8, 2020.

By Brian Plunkett, J.D.

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