Seattle Passes Excess Compensation Payroll Expense Tax to Fund Social Housing

In a special election on February 11, Seattle voters approved Proposition 1A to levy a 5% payroll tax on annual individual compensation over $1 million to fund the Seattle social housing developer. This adds an excess compensation payroll expense tax to the existing JumpStart Seattle payroll expense tax that went into effect in 2021. 

The tax, which is paid by employers, is imposed on compensation over $1 million paid to an employee in Seattle. Compensation is considered paid in Seattle if made to an employee that is primarily assigned to a location in the city limits. The term “primarily assigned” is defined as the location where the employee performs more than 50% of their duties during the calendar year. Members, partners, other owners of pass-through entities, and sole proprietors are considered employees for the new tax. The law prohibits deducting the tax from employee compensation. 

The tax is retroactive to January 1, 2025. For tax year 2025, companies subject to the new tax must file and remit by January 31, 2026, with quarterly returns due thereafter. Any businesses having employees in Seattle — even companies outside Seattle with remote employees in the city — who earn more than $1 million annually should evaluate their obligations. 

The tax is expected to raise $50 million in its first year. At least 95% of its proceeds are to be allocated to Seattle’s social housing developer, the public development authority established by Initiative 13 to develop and maintain affordable housing in Seattle. The lower of $2 million or 5% of the proceeds is earmarked for administration of the tax. 

The Seattle Office of City Finance has announced a webinar to educate companies about the tax. Taxpayers will have an opportunity to provide feedback ahead of the preparation of a draft rule.