By Nicole Lyons, CMI
On May 14th, 2018, the Seattle City Council, after much political wrangling and public debate, enacted a new employee hours tax (referred to as the “head tax”) on businesses in the city. The ordinance was signed by Mayor Durkan on May 16th and the tax will take effect on January 1, 2019. The revenue generated from the new tax is to be used to combat the issue of homelessness and the lack of affordable housing in the Seattle metropolitan area.
The new tax is imposed on businesses earning Seattle gross taxable income in excess of $20 million per year. For purposes of this threshold, taxable gross income is income subject to the city’s business license tax (commonly referred to as the city B&O Tax). Businesses that exceed the $20 million threshold will pay roughly $275 per full-time employee each year. Businesses will be required to file and pay the tax on the same frequency as their Seattle B&O tax filings (either quarterly or annually).
How the tax is calculated
The measure of the tax is the number of employee hours worked in the City of Seattle, multiplied by the rate of 14.323 cents per hour, excluding vacation and sick leave hours. If an employee works both inside and outside of Seattle, it is the responsibility of the employer to track and calculate tax on the hours worked within the city.
Alternatively, a business may calculate tax on the number of full-time equivalent (FTE) employees. For example, an employee who works full time would count as one employee, while an employee on a 50% schedule would count as one-half of an employee for purposes of the tax. Under this method, the tax is $68.75 of tax per quarter per full-time employee or FTE.
Are any businesses excluded from the tax?
Relief is provided for certain businesses, including businesses earning $20 million or less in taxable gross income from business activities in the city. This is based on the amount reported for city business license tax purposes.
While at first blush this may seem simple, it can be quite complicated, depending on the type of business involved. For businesses that sell physical items, such as clothing, taxable gross income from sales is determined based on where the purchaser receives the items sold.
Service businesses, on the other hand, must compute how much gross income is earned within the city using a complicated formula. This formula is based on the average of the relative amount of business payroll and receipts earned in the city. Due to the complications of computing this formula, businesses earning service-type income should review the computation with a knowledgeable advisor to ensure that the amount is correctly determined.
Besides the exemption for businesses earning $20 million a year or less in Seattle taxable gross income, certain other types of entities and organizations are per se exempt from the tax. This includes nonprofit organizations organized under Internal Revenue Code Sec. 501(c)(3), hospitals, and other comprehensive healthcare providers that provide at least 25% of their overall services to Medicaid or Medicare patients.
The importance of being prepared
By its terms, the employee hours tax is to remain in effect through December 31, 2023. However, a group of prominent Seattle businesses has already begun efforts to repeal the tax before it is set to take effect. Given the uncertainty as to whether these efforts will be successful, Seattle employers should understand the tax and evaluate its impact on them so that they will be ready if it does go into effect next year.
For more information on how to prepare for the Seattle head tax, please contact Nicole Lyons.
Nicole Lyons is a manager in Clark Nuber’s state and local tax practice. She specializes in providing consulting to clients in a variety of industries, including manufacturing, technology, healthcare, and professional services.
© Clark Nuber PS and Developing News, 2018. Unauthorized use and/or duplication of this material without express and written permission from this blog’s author and/or owner is strictly prohibited. Excerpts and links may be used, provided that full and clear credit is given to Clark Nuber PS and Developing News with appropriate and specific direction to the original content.