How the Seattle Payroll Tax Affects Non-Profit Healthcare Entities

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 took effect at the start of 2021 and sunsets at the end of 2040.

The tax is imposed on businesses and organizations with $7 million or more of Seattle annual “payroll expense.” However, 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.

The following will discuss the non-profit healthcare entity exemption and provide examples of the payroll tax in action. For a full overview of the Seattle payroll tax, please see our in-depth article here.

Non-Profit Healthcare Entity Exemption

As stated above, the payroll expense of employees with annual compensation below $400,000 is exempt from the tax for non-profit healthcare entities through December 31, 2023.

The term “non-profit healthcare entity” includes the following:

• A non-profit entity engaged primarily in the provision of comprehensive healthcare services, including primary and specialty care, and other non-profit healthcare entities that provide at least 50% of their services to patients covered by Apple Health and TRICARE, and to patients who have no third-party payor;
• A non-profit entity that conducts life sciences research and development; or
• A predominately capitated provider group within an integrated delivery system operated by a fully non-profit carrier.

“Life Science” means scientific research whose primary purpose is to understand human biology or pathology, or to improve human health, or to identify appropriate treatment (including ethical and policy aspects) of human disease, including basic research in non-human models (including in silica models).

“Research and Development” means activities performed to discover technological information, and technical and non-routine activities concerned with translating technological information into new or improved products, processes, techniques, formulas, inventions, or software.

• Research and Development includes exploration of a new use for an existing drug, device, or biological product if the new use requires separate licensing by the United States Food and Drug Administration under Chapter 21 in the Code of Federal Regulations, as amended.
• Research and Development does not include adaptation or duplication of existing products where the products are not substantially improved by application of the technology, nor does the term include surveys and studies not related to development, social science and humanities research, market research or testing, quality control, sale promotion and service, computer software developed for internal use, and research in areas such as improved style, taste, and seasonal design.

Examples of Non-Profit Healthcare Entity Exemption

Example 1

A non-profit healthcare entity with $8 million of Seattle payroll expense in 2020 has 20 employees that spend the majority of their time on the road (outside of Seattle) performing fundraising work throughout the year. The employees reside in Seattle and do not spend 50% of their total work hours in any city. Compensation for the 20 employees is paid in Seattle because the employees reside in Seattle and do not spend more than 50% of their time performing services in one city outside of Seattle.

Assuming the entity meets Seattle’s “non-profit healthcare entity” definition, from January 1, 2021 to December 31, 2023, the non-profit healthcare entity will qualify for a deduction from the Seattle payroll expense tax for Seattle employees who are paid less than $400,000. The non-profit healthcare entity will be subject to the payroll expense tax on the compensation of each Seattle employee that is greater than or equal to $400,000.

Example 2

Same as Example 1 above, except each employee is assigned to one specific geographic region and spend 50% of their time performing fundraising work in one city (outside of Seattle). Under this example, compensation is not paid in Seattle and not subject to the payroll expense tax.

Example 3

A non-profit healthcare entity with $8 million of Seattle payroll expense in 2020 has 20 employees that normally spend the majority of their time on the road (outside of Seattle) performing fundraising work throughout the year. The employees reside in Seattle and spend more than 50% of their time in one city (outside of Seattle city limits). However, during 2021, due to the COVID-19 pandemic, the 20 employees will spend more than 50% of their time working from their homes in Seattle.

Seattle Rule 5-980 outlines that compensation is paid in Seattle when an employee teleworks and perform their duties from their home in Seattle. Therefore, under these facts, compensation is likely paid in Seattle due to the employees performing more than 50% of their work from Seattle during COVID-19. Seattle has not provided further guidance related to the impact of employees teleworking as a result of COVID-19 on the imposition of the payroll expense tax.

Conclusion

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 organization’s may be assigned as annual filers at the city’s discretion. We expect the city to announce a specific threshold for annual filing.

It’s important that Seattle non-profit healthcare entities understand the impact the Seattle payroll expense tax will have on their organizations. If you have any questions about the Seattle payroll expense tax and how it will affect you, please contact any member of the Clark Nuber State and Local Tax group.

Yoandra Cortez is a senior in Clark Nuber’s State and Local Tax Services Group.

©2021 Clark Nuber PS. All rights reserved.