Article
Prepare for the Seattle’s new excess compensation payroll tax
March 10, 2025 · Authored by Adam Cline and Sarah Correia
A new payroll tax on employers with individuals earning excessive compensation in Seattle, Proposition 1A, was enacted on Feb. 12, 2025,
The tax takes effect retroactively to Jan. 1, 2025. For 2025, the tax return is due and payable by Jan. 31, 2026. Beginning in 2026, the tax is due in quarterly installments.
Prepare for this change effectively with the following overview.
Who’s affected by the new tax?
Effective Jan. 1, 2025, the tax is imposed on persons, including not-for-profit organizations or other entities, engaging in business in Seattle, with highly paid employees who earn more than $1,000,000.
Exemptions from the tax include:
- Independent contractors whose excess compensation is included in the tax paid by another business that’s subject to this tax.
- Businesses that are preempted from taxation by cities pursuant to federal or state statutes or regulation.
Unlike the existing Seattle payroll expense tax, there’s no minimum threshold based on total compensation paid by the employer.
- Independent contractors whose excess compensation is included in the tax paid by another business that’s subject to this tax.
- Businesses that are preempted from taxation by cities pursuant to federal or state statutes or regulation.
Unlike the existing Seattle payroll expense tax, there’s no minimum threshold based on total compensation paid by the employer.
What’s included in compensation and excess compensation?
For purposes of the tax, compensation paid to an employee includes:
- Salary, wages, and bonuses
- Commissions
- Equity compensation
- Severance payments and previously accrued compensation
In addition to traditional employees, employees also include:
- Individuals who are members of limited liability companies
- Members of professional limited liability companies
- Partners
- Other owners of pass-through entities
- Sole proprietors
Compensation doesn’t include payments to an owner of a pass-through entity that aren’t earned for services rendered or work performed, such as return of capital, investment income, or other income from passive activities.
Compensation doesn’t include payments to an owner of a pass-through entity that aren’t earned for services rendered or work performed, such as return of capital, investment income, or other income from passive activities.
Excess compensation
The tax is imposed on excess compensation paid in Seattle for each employee whose total compensation exceeds $1,000,000.
The amount of compensation paid in Seattle to employees can be determined as follows:
- The primarily assigned method, which attributes one hundred percent of the compensation paid to employees who perform work exclusively within Seattle, primarily in Seattle, or to the city of residence if work is performed inside and outside Seattle, but not primarily Seattle, and the employee is a resident of Seattle; or
- The hours method, for employees who work partly inside and partly outside city limits, the portion of the employee's annual compensation equaling the total number of hours worked within Seattle bears to the total number of the employee's hours worked within and outside Seattle.
Alternative methods may be used, subject to approval by the City of Seattle Tax Director.
What’s the tax rate?
The amount of tax due is 5% of the excess compensation paid in Seattle for each employee of the taxpayer.
A business may not make any deductions from the employees’ compensation to pay for this tax. The tax is in addition to the existing Seattle Payroll Expense Tax.
A business may not make any deductions from the employees’ compensation to pay for this tax. The tax is in addition to the existing Seattle Payroll Expense Tax.
The information provided here is of a general nature and is not intended to address the specific circumstances of any individual or entity. In specific circumstances, the services of a professional should be sought. Tax information, if any, contained in this communication was not intended or written to be used by any person for the purpose of avoiding penalties, nor should such information be construed as an opinion upon which any person may rely. The intended recipients of this communication and any attachments are not subject to any limitation on the disclosure of the tax treatment or tax structure of any transaction or matter that is the subject of this communication and any attachments.