Payroll expense tax

Note: Businesses subject to the payroll expense tax

Year Total Payroll Expense At Least One Employee
With Annual Compensation of
2022   $7,386,494 or more in 2021 $158,282 or more in 2022
2021   $7 million or more in 2020 $150,000 or more in 2021

Businesses with less in payroll expense do not need to file or pay this tax, but they are still responsible for filing and paying other general business taxes to which they are subject.

Payroll Expense Tax Online Training

  • Find out how the tax is assessed
  • Learn how to determine your tax liability
  • Understand tax filing requirements
  • Have the chance to ask questions about the filing and payment process

Wednesday, July 13, 10 a.m. - Register here.

Please be aware that written communications and webinar registration information - including email addresses, names, and business affiliations - are potentially subject to public disclosure, in whole or in part, pursuant to the Washington State Public Records Act, RCW 42.56 et seq

See the presentation from the May 18, 2022 webinar.

Payroll Processing Companies

  • If you are a payroll processing company remitting the Seattle Payroll Expense Tax on behalf of clients, you will need to submit a Taxpayer Authorization Form with each initial tax filing.
  • A signed authorization will not need to be submitted each quarter. We are requiring one authorization per business/client. We may reach out at any time and request updated documentation.
  • The signed authorization form should be submitted with the next manual filing and payment for each client. If you are filing online using the FileLocal system, you do not need to submit this authorization form.
  • Filings without a signed authorization form may be rejected and returned.
  • If you have any questions, please contact us at tax@seattle.gov.

2022 Payroll Expense Tax Quarterly Filing Form - due on April 30, 2022, and quarterly thereafter.

2021 Payroll Expense Tax Filing Form - due Jan. 31, 2022

File online or send original form via U.S. Mail (including payment and postmarked by the due date) to:
City of Seattle-LTA
PO Box 34907
Seattle, WA 98124-1907

The payroll expense tax in 2022 is required of businesses with:

  • $7,386,494 or more of payroll expense in Seattle for the past calendar year (2021), and
  • compensation in Seattle for the current calendar year (2022) paid to at least one employee whose annual compensation is $158,282 or more.

Director's Rule 5-980 provides information and examples to determine whether your business is subject to the Payroll Expense Tax and how to calculate your tax payment.

If you have questions, please email tax@seattle.gov or call our general information line at (206) 684-8484.

Read the Code SMC Chapter 5.38

  • This tax is imposed in addition to any license fee or tax imposed by the City, State or other government agency.
  • The payroll expense tax is in addition to the City of Seattle's fees for business license tax certificates and both the Washington State and City of Seattle B & O tax.

Payroll Expense Tax FAQs

The Seattle Payroll Expense Tax is a business excise tax applicable to all business that are engaging in business in Seattle.   

Businesses subject to the Payroll Expense Tax:

Tax Year Total Payroll Expense At Least One Employee
With Annual Compensation of
2022   $7,386,494 or more in 2022   $158,282 or more in 2021
2021   $7 million or more in 2021   $150,000 or more in 2020



The first tax return was due January 31, 2022. Businesses subject to the tax will file and pay on a quarterly basis by January 31, April 30, July 31, and October 31.

No. The payroll expense tax is a tax on employers that have Seattle annual payroll expense of $7,386,494 or more. The payroll expense tax is levied upon businesses, not individual employees. The tax is paid by the employer and there is no individual withholding. The law specifically precludes employers from withholding the tax from their employees.

In 2022 only businesses that had $7,386,494 or more of payroll expense in Seattle in the previous calendar year and have payroll expense in Seattle paid to employees whose annual compensation is $158,282 or more in the current calendar year need to file a payroll expense tax return.

For 2021 obligations, which were due Jan. 31, 2022, businesses are subject to the tax if they had $7 million or more in payroll expense in Seattle in 2020 and at least one employee whose annual compensation in 2021 was $150,000 or more. 

   Payroll expense of less than $105,521,339 Payroll expense of $105,521,339 but less than $1,055,213,392 Payroll expense of $1,055,213,392 or greater
Annual compensation
$0 - $158,282
N/A N/A N/A
Annual compensation
$158,282- $422,085
Rate = 0.7% Rate = 0.7% Rate = 1.4%
Annual compensation
$422,085 or more
Rate = 1.7% Rate = 1.9% Rate = 2.4%

Beginning January 1, 2022, and on January 1 of every year thereafter, the dollar threshold and exemption amount will be adjusted for inflation.

Each year the Payroll Expense Tax thresholds may increase based on the annual Consumer Price Index. The thresholds for 2022 are shown below.

Ordinance 126108 and the Seattle Municipal Code (SMC) 5.38.070 specify annual adjustments to the payroll expense dollar thresholds and exemption thresholds for the Payroll Expense Tax. Beginning Jan. 1, 2022, and on January 1 of every year thereafter, the dollar thresholds will increase based on the rate of growth of the prior year's June-to-June Consumer Price Index (CPI-U) for the Seattle-Tacoma-Bellevue area as published by the United States Department of Labor. The following thresholds may adjust annually:

  • The amount of payroll expense dollar thresholds (SMC 5.38.030)
  • The amount of the exemption (SMC 5.38.040.A.1)

The amounts calculated shall be rounded to the nearest whole dollar. For 2022, the rates will increase by 5.5 percent and businesses subject to the tax will be those who had at least $7,386,494 in payroll expense in 2021.

   Payroll expense of less than $105,521,339 Payroll expense of $105,521,339 but less than $1,055,213,392 Payroll expense of $1,055,213,392 or greater
Annual compensation
$0 - $158,282
N/A N/A N/A
Annual compensation
$158,282- $422,085
Rate = 0.7% Rate = 0.7% Rate = 1.4%
Annual compensation
$422,085 or more
Rate = 1.7% Rate = 1.9% Rate = 2.4%

The payroll expense deduction for non-profit healthcare entities is limited to annual compensation of $150,000 to $399,999.99 and is not adjusted for inflation using the Consumer Price Index (CPI). SMC 5.38.045 states that for the period from Jan. 1, 2021 through Dec. 31, 2023, taxpayers that are non-profit healthcare entities may deduct from the measure of the tax the payroll expense of employees with annual compensation of $150,000 to $399,999.99. SMC 5.38.070 provides for a CPI linked inflation adjustment for the amount of the dollar thresholds in SMC 5.38.030 (tax imposed) and the amount of the exemption in SMC 5.38.040.A.1 ($7 million prior year threshold). SMC 5.38.070 does not provide for an inflation adjustment for the deduction for the annual compensation of non-profit healthcare entities listed in SMC 5.38.045. Non-profit healthcare entities that utilize this deduction are only permitted to deduct the payroll expense of employees that were included in the calculation of the payroll expense total subject to the tax.

The payroll expense tax can be paid electronically or manually. FileLocal is the online tax filing portal for the City of Seattle. This is the same portal many taxpayers currently use to file and pay a variety of other Seattle business taxes, including B&O, Commercial Parking, Admissions, etc. Manual forms can be completed and mailed to the address provided on the back of the form. Returns are not deemed filed until both tax filing and payment are received. 

The payroll expense tax can be filed through FileLocal using the business's customer number. Businesses engaging in business in Seattle must have a Seattle Business License Tax Certificate. This certificate contains the customer number assigned to the business. Businesses filing the payroll expense tax manually need to include the customer number as well as legal name and address on the filed form. If a business does not have a Business License Tax Certificate, they can apply for a Business License Tax Certificate at FileLocal. If you are filing returns as a preparer on behalf of another business, you can create a Preparer Account in FileLocal to file returns on behalf of your client. The business will need to grant you permission to file their returns in FileLocal

 The preferred method of filing this tax is electronically, using FileLocal. A manual tax form is also available.

Payroll expense means compensation paid in Seattle to employees. Compensation has the same meaning for purposes of the payroll expense tax as it does for the Washington State Family and Medical Leave program. Compensation includes all payments for personal services, including commissions and bonuses and the cash value of all earnings paid in any medium other than cash.

For each tax year, the taxpayer shall select one of the two methods listed below to determine the compensation paid in Seattle to the taxpayer's employees. The taxpayer shall follow the same method for all employees for the entire tax year.

Hours method

The amount of compensation paid in Seattle to employees shall be:

1. One hundred percent of the compensation paid to employees who perform work exclusively within Seattle; and

2. For employees who perform work partly within and partly outside Seattle, the compensation paid in Seattle to those employees shall be, for each individual employee, the portion of the employee's annual compensation which the total number of the employee's hours worked within Seattle bears to the total number of the employee's hours worked within and outside Seattle.

3. Taxpayers who calculate payroll expense using this method may exclude from the measure of the tax the payroll expense of employees who work within Seattle less than 40 hours during the tax year.

If the taxpayer does not select the method above, then the amount of compensation paid in Seattle to employees shall be determined as follows.

Primarily-assigned method

Compensation is paid in Seattle to an employee if:

1. The employee is primarily assigned within Seattle;

2. The employee is not primarily assigned to any place of business for the tax period and the employee performs 50 percent or more of their service for the tax period in Seattle; or

3. The employee is not primarily assigned to any place of business for the tax period, the employee does not perform 50 percent or more of their service in any city, and the employee resides in Seattle.

An employee that performs more than 50 percent of their duties during the calendar year at a business location of the taxpayer, will be primarily assigned to that business location.

Compensation includes all payments for personal services, including commissions and bonuses and the cash value of all compensation paid in any medium other than cash. Compensation includes remuneration as defined by the Washington State Family and Medical Leave program in RCW 50A.05.010. A list of items that the Washington State Employment Security Department considers compensation can be found in Seattle Rule 5-980(2)(a)(ii)

Compensation does not include:

  1. Tips;
  2. Supplemental benefit payments made by an employer to an employee in addition to any paid family or medical leave benefits received by the employee;
  3. Employee exercised stock options (incentive stock options (ISOs) or non-qualified stock options (NQSOs));
  4. Payments provided to cover a past or future cost incurred by the employee as a result of the employee's expected job functions;
  5. Employer contributions into retirement or disability plans; or
  6. Payments to an owner of a pass-through entity that are not earned for services rendered or work performed (i.e., return of capital, investment income, or other passive activities). 

Compensation includes the value of stocks transferred to the employee during the calendar year if part of a compensation package. This would include stock grants, Restricted Stock Units (RSUs), and Performance Stock Units (PSUs). Stock options and any related gains from exercising stock options are not considered compensation for purposes of the payroll expense tax. 

Yes, compensation also includes employee contributions to deferred compensation plans (e.g., 401(k), 403(b), or other deferred compensation plans) in which a portion of an employee's salary or wages are set aside to be paid at a later date. 

Compensation means remuneration as defined by the RCW 50A.05.010. If the amounts are included as compensation for purposes of the Washington State Employment Security Department's State Family and Medical Leave program, then they should be included for purposes of the payroll expense tax. If employee deductions would not reduce wages reported to the Washington State Employment Security Department (ESD) for purposes of the Family and Medical Leave program, then they would not be excluded from compensation for the payroll expense tax.

Compensation is based on gross pay. Payroll expense is the gross compensation paid in Seattle to employees. 

The total payroll expense for employees in Seattle that have annual compensation of $158,282 or more, starting with the first dollar paid, must be included in the amount subject to the payroll expense tax. 

Businesses subject to the payroll expense tax are required to maintain and keep complete and adequate records. Records must be kept in such a manner as to enable the tax administrator to determine the payroll expense tax liability of the taxpayer. Records retained must be presented upon request of the tax administrator and demonstrate the payroll expense of the business, including but not limited to; where employees are primarily assigned, perform their services, and reside, and employee compensation. Examples include but are not limited to; W-2 and earnings summaries and workpapers and other employment tax records; work location schedules; teleworking agreements between employee and employer; payroll expense reports; copies of state employment security returns and their workpapers; etc.

Certain business activities are exempt from the tax. These include:

• Grocery businesses. Those businesses in which at least 70 percent of their gross sales is exempt from retail sales tax. This includes wholesalers of food and food ingredients that would be exempt from tax when resold would also be exempt from retail sales tax under RCW 82.08.0293;

• Any business having compensation paid in Seattle to employees of less than $7,386,494 in the previous calendar year;

• Compensation paid in Seattle to an independent contractor whose compensation is included in another business's payroll expense; and

• Any business engaged in business in Seattle that is preempted from taxation by cities under federal or state statutes or regulations. These include insurance businesses and their appointed insurance producers; businesses that only sell motor vehicle fuel; businesses that only distribute liquor; and federal, state, and local government entities. 

Yes. There is not a general payroll expense tax exemption for non-profit 501 C organizations. 

The $7 million exemption threshold is based on the prior year's compensation paid to Seattle employees. For example, to determine if an employer is subject to the payroll expense tax in 2021, an employer will use its 2020 compensation paid to Seattle employees to determine if they have met the $7 million or more in payroll expense threshold. However, businesses must use the current year's compensation paid in Seattle to determine the payroll expense tax due for the year. For example, in 2021, businesses that had $7 million or more in Seattle payroll expenses in 2020 would apply the tax rates based on their 2021 Seattle payroll expense of employees with annual compensation of $150,000 or more. 

A deduction is available for the employer if they are a non-profit healthcare entity. A business that qualifies as a non-profit healthcare entity may deduct the payroll expense of employees whose compensation is $150,000 to $399,999.99 from the payroll expense of the business. The employer would deduct the payroll expense of such employees on the tax return.

A non-profit health-care entity is (1) a non-profit entity that provides comprehensive healthcare services, including primary and specialty care, and non-profit healthcare entities that provides at least 50% of its services to patients covered by Apple Health and TRICARE and to patients who do not have a third-party payor; (2) a non-profit entity that conducts life sciences research and development; or (3) a predominantly capitated provider group with an integrated delivery system operated by a fully non-profit carrier. 

The payroll expense tax was adopted by Ordinance 126108 and amended by Ordinance 126309.

You may contact License and Tax Administration at (206) 684-8484 or tax@seattle.gov.