The city of Seattle has recently enacted a new Payroll Expense Tax: JumpStart Seattle (City Ordinance 126108), on wages being paid to Seattle employees. You may have already heard about this new tax. We wanted to share some of the key points.
- This tax was passed in July 2020 to generate revenue to help with the affordable housing crisis, homelessness, and the economic downturn caused by the COVID-19 pandemic.
- It was challenged as unconstitutional but was upheld by a King County Superior Court Judge in June 2021.
- The tax went into effect January 1, 2021, and it will extend through December 31, 2040.
Payroll Subject to the Tax:
- This tax applies to businesses when their annual Seattle payroll expense exceeds $7 million.
- Employers subject to the tax include for-profit businesses and not-for-profit organizations
- The starting tax rate is 0.7% on compensation paid to Seattle employees greater than $150,000.
- Compensation includes all payments for personal services.
- To be subject to the tax, the employee’s compensation must be paid in Seattle.
- The tax rate increases progressively based on total Seattle compensation and individual compensation to Seattle employees. (See table below)
Determining Seattle Compensation:
There are two methods for determining compensation paid in Seattle to employees.
Hours Method – The amount of compensation paid in Seattle is:
- One hundred percent of the compensation paid to employees that work exclusively in Seattle.
- Allocated based on the number of hours worked within and outside of Seattle by an employee.
Primarily Assigned Method – Compensation is considered paid in Seattle if:
- The employee is primarily assigned in Seattle.
- The employee is not primarily assigned to any place of business for the tax period, but they perform at least 50 percent their work in Seattle.
- The employee is not primarily assigned to any place of business for the tax period and does not perform at least 50 percent of their work in any city, but they reside in Seattle.
The method used on the first return filed for the year must be used for the remainder of the year.
Certain business activities are exempt from this tax. These include:
- Any business with compensation paid in Seattle less than $7 million in the prior calendar year.
- Grocery businesses.
- Any individual that is an independent contractor whose compensation is included in another business’s payroll expense.
- Businesses that are preempted from taxation by cities under federal or state law.
- Nonprofit healthcare entities may deduct payroll expenses of employees with compensation of $150,000 to $399,999.99 from the tax from Jan. 1, 2021, through Dec. 31, 2023.
- The payroll expense tax for 2021 is due January 31, 2022.
- Beginning in 2022, the tax must be paid on a quarterly basis.
- Businesses cannot pass the tax along to employees through payroll deductions.
If you have questions about how this new tax may impact you, please feel free to reach out to us.