July 18, 2022

This article was originally posted on 8/19/2020. It has been updated to reflect news and updates as of 12/15/2023. 

12/15/2023 Update: On November 21, 2023, the Seattle City Council passed Ordinance 126944 extending the existing Seattle Payroll Expense Tax deduction for non-profit healthcare entities until December 31, 2026, providing an inflationary adjustment for that deduction, and making inflationary adjustments for the general tax rates that apply to all taxpayers. These changes take effect January 1, 2024.

7/18/2022 Update: In a July 18 message to members, Seattle Metropolitan Chamber of Commerce President Rachel Smith said the prospects for success in the case, Greater Seattle Chamber of Commerce v. City of Seattle, weren’t strong enough to justify appealing it to the Washington State Supreme Court. 

6/21/2022 Update: The Washington State Court of Appeals, Division 1, ruled in Greater Seattle Chamber of Commerce v. City of Seattle that the Seattle payroll expense tax is a lawful excise tax on businesses imposed under powers vested in the City by the state legislature and the state constitution. It did not accept the Seattle Chamber of Commerce’s argument that the tax is an unlawful levy on an employee’s right to earn a living by working for wages. In so ruling, the Washington Court of Appeals affirmed the decision reached by King County Superior Court in 2021.

6/24/2021 update: The Seattle City Council have made changes to the existing law. Read about the new “hours method” here

On July 6, 2020, the Seattle City Council passed City Ordinance Number 126108, imposing a payroll expense tax on persons engaging in business in Seattle. The ordinance takes effect at the start of 2021 and sunsets at the end of 2040. The tax will be imposed on businesses and organizations with at least $7 million of Seattle annual “payroll expense.”

Filing Frequency

The 2021 payroll expense tax annual return and payment will be due January 31, 2022. After 2021, the payroll expense tax will be due and payable on a quarterly basis, but businesses may be assigned as annual filers at the city’s discretion. We expect the city to announce a specific threshold for annual filing.

Tax Imposed

The payroll expense tax applies to the compensation of each Seattle employee that equals or exceeds $150,000. The definition of “employee” includes individuals who are treated as independent contractors for purposes of Seattle business license tax. Compensation paid in Seattle to an independent contractor whose compensation is included in another business’ payroll expense are exempt from the payroll expense tax. The tax rate ranges between .7% and 2.4% and is based on both the annual compensation paid to each employee and the total Seattle payroll expense of the business. The table below shows the applicable tax rates.

As shown in the table above, for businesses with annual Seattle payroll expense greater than $7 million, either a .7% or 1.4% tax rate will apply on the payroll expense of Seattle employees with annual compensation greater than $150,000 but less than $400,000. A tax rate of 1.7%, 1.9%, or 2.4% will apply on the payroll expense of Seattle employees with annual compensation of $400,000 or more.

Payroll Expense Definition

The term “payroll expense” means compensation paid to a Seattle employee. Compensation is defined as remuneration (including commissions and bonuses), net distributions, or incentive payments, including guaranteed payments, whether based on profit or otherwise, earned for services rendered or work performed, whether paid directly or through an agent, and whether in cash or in property or the right to receive property.

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.

Compensation is paid to a Seattle employee if:

  • The employee is primarily assigned within Seattle;
  • The employee is not primarily assigned to any place of business for the tax period and the employee performs 50% or more of his or her service for the tax period in Seattle; or
  • The employee is not primarily assigned to any place of business for the tax period, the employee does not perform 50% or more of his or her service in any city, and the employee resides in Seattle.

The ordinance defines “primarily assigned” as “the business location of the taxpayer where the employee performs his or her duties.” However, there may be significant complexities and material tax consequences for businesses with employees working in multiple jurisdictions, as the definition above highlights. (See our article on the tax implications of working remotely.)


The following are excluded or exempted from the Seattle payroll expense tax:

  • Businesses with annual Seattle payroll expense less than $7 million;
  • Grocery businesses;
  • Businesses that are preempted from taxation by cities pursuant to federal or state statutes or regulations, such as insurance agents, motor vehicle fuel manufacturers and sellers, liquor distributors and sellers, federal and state government agencies, and local governmental entities;
  • For the period of January 1, 2019 through December 31, 2023, non-profit healthcare entities are exempted from the tax on the payroll expense of employees with annual compensation below $400,000. (Read more about the non-profit healthcare entity exemption here.)

Comparison to Repealed Seattle Employee Hours Tax

In 2018, the Seattle City Council passed a similar tax, known as the employee hours tax or “head tax,” that imposed a tax on businesses with Seattle gross taxable income in excess of $20 million per year. For taxpayers above the minimum threshold, the employee hours tax was to have been imposed on all employee hours worked within the City (or all Seattle full-time equivalent employees) at a full-time equivalent rate of $275 per employee per year. The tax was retroactively repealed less than a month after it was enacted due to the significant amount of opposition it received from Seattle businesses and citizens.

Seattle Mayor Jenny Durkan did not veto the ordinance imposing the new payroll expense tax, but chose not to sign the legislation. The mayor expressed concerns about the impacts of the tax on Seattle’s economy and growth in a letter to the City Council. The Seattle City Council’s 7-2 vote in favor of the Seattle payroll expense tax indicates that the City Council could have overridden a veto from Mayor Durkan.

Legal Challenge

In December, the Seattle Chamber of Commerce filed a lawsuit challenging the constitutionality of the payroll expense tax. The lawsuit alleges that the Seattle City Council imposed the payroll expense tax on “the right to earn a living” as opposed to a permissible excise tax on “the privilege of doing business.” Under state law, a city excise tax must be imposed on a “substantive privilege granted or permitted” by the city. Because the Seattle business license tax is already imposed on the privilege of engaging in business, the Chamber argues that no additional privilege of doing business is available upon which to impose the payroll expense tax. The Chamber cites as precedent Cary v. City of Bellingham, in which the state Supreme Court ruled that a city cannot tax the ability to earn a living.


It’s important that Seattle employers understand the impact the Seattle payroll expense tax will have on their businesses prior to when it takes effect in 2021. If you have any questions about the Seattle payroll expense tax and how it will affect your business, please contact any member of the Clark Nuber State and Local Tax group.

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