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Our tax blog is dedicated to CFOs, Tax Directors and Business Owners looking to improve profitability, grow their business or implement a succession plan. At Armanino, we see the tax function as a key strategic tool—as nothing less than a vital means of moving you and your company forward. While we excel in making sure our clients meet regulatory requirements—both domestic and global—that just scratches the surface of what we do.

July 15, 2020

Seattle City Council Passes JumpStart Seattle, Implementing New Employee Payroll Expense Tax

Posted by Darcy Kooiker

Tax

On July 6, the Seattle City Council passed a bill called JumpStart Seattle as a way to raise more than $200 million per year to help homeless people. The decision is essentially veto-proof, but Seattle Mayor Jenny Durkan has expressed concern about the bill, suggesting a tax with a wider base (perhaps extending to King County or even state-wide) and with lower rates would be preferable.

This bill targets companies with total annual Seattle-based payroll expenses of $7 million or more.  JumpStart Seattle will impose a quarterly tax on businesses with rates ranging from 0.7% to 2.4%, which is calculated based on total annual compensation per each employee earning more than $150,000.  The term “employee” also includes independent contractors.    

Details

JumpStart Seattle will be effective January 1, 2021, through December 31, 2030, (10-year sunset provision) and imposes a new tax:

Total Seattle-Based Payroll Expense
Salary Amount$7 million to $99.9 million$100 million to $99.9 million$1 billion or more
$150,000 – $399,9990.7%  0.7%  1.4%
$400,000 +1.7%1.9%2.4%

The taxpayer’s total Seattle-based payroll expense is used to determine the tax rate applicable to each employee.   

Payroll expense includes remuneration, net distributions or incentive payments, including guaranteed payments earned for services rendered or work performed, whether paid in cash or in property or the right to receive property.  It 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. 

Payroll expense is determined on an employee-by employee basis and is deemed to be “Seattle-based” if it meets any of these three criteria:

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

Example:  A business with $10 million of total Seattle-based payroll expense (falling in the lowest rate tier) will calculate the tax as follows:

Employees Earning More Than $150,000Primary Work LocationSalaryTax RateTax
ElaineSeattle$1,500,0001.7%$25,500
KevinIssaquah$750,0001.7%$0
DanaIssaquah$350,0000.7%$0
RichardSeattle$275,0000.7%$1,925
$27,425

The following types of businesses, as well as federal, state and local governments are exempt from the tax:

  • Grocery stores
  • Businesses that only sell, manufacture, or distribute motor vehicle fuel
  • Businesses that only sell or distribute liquor
  • Insurance businesses and their agents
  • Independent contractors, but only if their compensation is included in the payroll expense of another business subject to the tax.

Insights

Taxpayers doing business within Seattle should review their business profile and determine with a state tax professional how this new tax may impact their business.

If you have any additional questions, or if you have a specific situation to discuss, contact our experts.

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