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.

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.

Article

Prepare for the Seattle’s new excess compensation payroll tax

March 10, 2025 · Authored by Adam Cline, 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.

Adam Cline

Principal

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.