Employment Tax

United States | Washington—Social Housing Tax and proposed payroll excise tax

Summary

In a special election held February 11, 2025, the voters of the City of Seattle approved the Social Housing Tax. The tax is imposed on businesses at a tax rate of 5% on compensation that exceeds $1 million paid in Seattle to an employee. The new tax went into effect January 1, 2025.

Washington state lawmakers are also considering a new tax proposal that specifies a new 5% tax on employee payroll above the Social Security wage threshold (currently $176,100 for 2025) for large employers.

The detail

Social Housing Tax

Imposition of the Social Housing Tax & scope of employees for employers

• The Social Housing Tax was created by the Seattle Social Housing Developer to develop, own, and maintain social housing developments in the City of Seattle.
• The Social Housing Tax is levied on businesses who have employees paid for work in the city of Seattle. The tax is assessed on subject employees’ gross wages. Employers may not make any deductions from the employees’ compensation to pay for this tax. The following methods outline the employees considered paid in the city of Seattle.
• Under the “Primarily Assigned Method” employees are considered “primarily assigned” to the business location where the employee performs 50% or more of their duties. If this location is in the city of Seattle, then 100% of the wages the employee received for the year would be included in the tax calculation. Conversely, if an employee works 40% of the time in Seattle and the remaining 60% outside of Seattle, then 0% of the wages for this employee are included in the tax calculation.
• Under the “Hours Method” wages are allocated to Seattle based on the number of hours worked in the city. If employees live in Seattle and work from home for a portion of the week/year, they would be taxable under the “Hours Method” if this method is chosen by the employer. This taxation under the “Hours Method” would also apply to business travelers into Seattle. Similarly, Seattle based employees can have wages reduced for travel to non-Seattle locations. The employer must make the calculation method election each year and cannot change the election type during the year.
• Persons engaging in business within Seattle are subject to the tax. The amount of tax due shall be 5% of the excess compensation paid in Seattle for each employee of the taxpayer.
• “Excess compensation” means annual compensation to an employee in excess of $1,000,000 for purposes of this tax. If the “Primarily Assigned Method” is used and the employee is determined to be a Seattle based employee, the tax would apply on all compensation over $1 million regardless of where it was paid. If the “Hours Method” is used, the excess compensation would be prorated based upon the percentage of hours worked in Seattle.
• For tax year 2025, Seattle businesses subject to the Social Housing Tax will file their return and remit the tax due by January 31, 2026.
• Thereafter, businesses subject to the Social Housing Tax will file and pay the tax on a quarterly basis.

Exemptions to the Social Housing Tax

• Any individual who is an independent contractor for purposes of the business license tax under Seattle code is not subject to the tax.
• Businesses that are preempted from taxation by cities pursuant to federal or state statutes or regulations in the state of Washington are not subject to the tax.

Proposed excise tax above the Social Security wage threshold

• Washington state lawmakers are currently considering SB 5796 – 2025-26 which would impose a new 5% tax on employee payroll above the Social Security wage threshold (currently $176,100 for 2025) for large employers beginning July 1, 2026.
• For the purposes of this bill, a large employer is defined as any employer with total employee wages of more than $7,000,000.
• The intention of the tax is to increase the states general fund which funds public schools, healthcare and social services for the state of Washington.
• The tax under this section is imposed on the employer. An employer may not make any deductions from employee wages to pay for this tax.
• Remittance of the tax has not been specified yet. The employment security department will provide guidance at a later date if the bill moves forward.

Exemptions to the proposed excise tax

• The payroll expense tax does not apply to any employer with total employee wages equal to or less than $7,000,000 for the prior calendar year.

Contact us

For a deeper discussion on the above, please reach out to your Vialto Partners point of contact, or alternatively:

Tina Schrob
Partner 

Amie Nidoy
Director 

Tina Roy
Manager 

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