A new jobs tax, passed by the Seattle City Council in July under the catchphrase “JumpStart Seattle,” may catch employers by surprise when it goes into effect on January 1, 2021. It is characterized as an excise tax imposed on the privilege of engaging in business — the same privilege already taxed by Seattle's local B&O tax — and applies to businesses with $7 million or more of annual Seattle payroll expense in the prior year. As we reported in a prior legal update, the amount of the tax will be measured by the compensation of each employee earning $150,000 or more annually. This is an employer-funded tax, and employers may not deduct from the employee's compensation to fund the tax. 

Details of the Seattle Jobs Tax

The tax is tiered, depending on the annual compensation of the employee and the annual payroll expense of the business:

Annual Payroll Expense

Employees With Annual Compensation of $0-$149,999.99

Employees With Annual Compensation of $150,000-$399,999.99

Employees With Annual Compensation of $400,000 or more

Less than $100M




Greater than $100M but less than $1B




$1B or greater




Employers should be aware that these are not marginal tax rates. That is, if an employee earns $149,999.99 and then is paid one cent more, then the entire $150,000 in compensation is taxed. Similarly, if an employee's compensation increases from $399,999.99 to $400,000, the entire $400,000 will be taxed at the higher rate. It is possible that the tax cost could be greater than the cost of additional compensation when it pushes the total compensation into a higher tax bracket. Employers should keep this in mind when determining the impact of the Seattle Jobs Tax on their business.

Employers will need to determine their annual “payroll expense” to determine their tier. “Payroll expense” is defined to mean the compensation paid “in Seattle” to employees. Compensation is paid “in Seattle” if:

  • The employee is primarily assigned within Seattle; or
  • The employee is not primarily assigned within Seattle but performs more than 50 percent of their services in Seattle; or
  • The employee is not primarily assigned in Seattle and does not perform 50 percent or more of their services in Seattle but the employee resides in Seattle.

The city of Seattle has circulated a draft rule explaining that an employee will be deemed to be “primarily assigned” if the employee performs more than 50 percent of their work at a business location of the employer. Under the draft rule, the employee's residence will not be considered a place of business of the employer. Thus, compensation to an employee who performs more than 50 percent of their work at home would be attributed to the employee's residence under the second bullet point above — because that is the location where more than 50 percent of the work is performed.

“Compensation” means remuneration as that term is defined in RCW 50A.05.010 (which codifies Washington's Family and Medical Leave Act), and it includes commissions, bonuses, net distributions, incentive payments and guaranteed payments. Compensation does not include payments to owners of a pass-through entity not earned for services rendered or work performed, such as return of capital, investment income or other income from passive activities. In the current draft rule, a stock grant is deemed compensation, but a stock option is not. In contrast, for federal income tax purposes, a grant and an option are both viewed identically as compensation.

The Seattle payroll tax is subject to some exceptions and exemptions:

  • From January 1, 2021 to December 31, 2023, nonprofit healthcare entities are only subject to a tax on the payroll expenses of employees with annual compensation of $400,000 or more.
  • Businesses with annual compensation of less than $7 million in the previous year are exempt.
  • Employers may be exempt if they are:
    • Engaged in the grocery business;
    • Engaged in the insurance business;
    • Selling, manufacturing or distributing motor vehicle fuel;
    • Distributing or selling liquor; or
    • A federal or state government agency.

Additionally, the payroll tax requires quarterly payments, but the tax is based on annual numbers. The current draft rule instructs employers to estimate their tax based on the compensation paid in the first three quarters of the year, and then employers will be required to “true up” the tax in the fourth quarter. This is helpful if an employee is under the threshold for most of the year, but then receives a year-end bonus that puts them over the threshold.

The draft rule indicates that the city of Seattle does not currently intend to penalize employers for failing to accurately predict the employee's final annual compensation during the first three quarters of the year — so long as the employer's final fourth quarter tax payment results in the total annual tax being accurately paid. Fourth quarter adjustments might go both ways. For example, if an employee with an annual salary over $150,000 were to leave the company before the end of the year (and before the employee had been paid a total of $150,000 for the year), any taxes paid in the first three quarters on the former employee's compensation would effectively become a credit applied to reduce the fourth quarter final payment.

Frequently Asked Questions About the Seattle Payroll Tax

Q: If an employer has an office in Seattle, but also offices in Spokane and Portland, does the tax only apply to its Seattle office employees? And when determining the level of tax on total payroll, do you include payroll in non-Seattle offices even if you do not pay tax on wages paid to those employees?

A: The tax only applies to the Seattle office employees. You would not include payroll for the non-Seattle offices because “payroll expense” is defined as compensation paid in Seattle to employees. However, if an employee who typically worked in the Portland office spent 50 percent or more of her time in the Seattle office for a given year, her compensation would be considered as paid in Seattle and you would treat that employee's total annual compensation as having been paid “in Seattle.”

Q: What if an employer has an office in Seattle, but employees working on Bainbridge Island in Kitsap County or in Bothell in Snohomish County? 

A: The employees' compensation would be taxed if the employees perform 50 percent or more of their services for the tax period in Seattle. Thus, if they came into the Seattle office three days a week, their entire compensation would be taxed. However, if they work exclusively outside out of Seattle, their compensation would not be included in determining tax liability. 

Q: If a company located in Bellevue has an employee working on a Seattle construction site all year, and that employee makes over $150,000, would the payroll tax apply to that employee? 

A: Yes. The key is where the employee performs at least 50 percent of their work — if there is a single location, such as a construction site, then 100 percent of the employee's compensation is sourced to that location. If the construction site is a business location of the employer, then the compensation is paid in Seattle, and the payroll tax would apply. Even if the construction site is not a business location of the employer, but the employee performs 50 percent or more of their services in Seattle, then the conclusion is the same, and the compensation is paid in Seattle and the payroll tax would apply.

What Steps Should Employers Take Now?

1. Conduct an audit. Review your current workforce to determine where employees are actually working. For those employees working in multiple locations, track their time to determine whether more than 50 percent of their time is spent in Seattle. 

2. Employers who have offices in Seattle and attribute employee compensation to a location other than a Seattle office should retain records verifying that the employee worked less than 50 percent of the time in the Seattle office. To the extent that the employer also attributes the employee's compensation to a location other than the employee's residence, the documentation should affirmatively establish that the employee worked at least 50 percent of the time in a specific city.

3. Evaluate the financial impact of the tax. Consider whether keeping employees who are currently working from home in non-Seattle locations teleworking would lower your overall tax burden.

4. Seek legal advice. Make sure you understand how this payroll tax will impact your bottom line. A business license can be denied or revoked if tax liability is misrepresented. 

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.