Seattle adopts tax on certain compensation exceeding $1 million

In brief

What happened?  

On February 11, 2025, Seattle voters approved the Seattle Social Housing Tax in a special election. Effective January 1, 2025, the tax imposes a 5% levy on total annual compensation exceeding $1 million paid to any Seattle-based employee. The revenue will fund the development and maintenance of permanently affordable housing in the city. 

Why is it important?  

This payroll tax introduces a new reporting requirement for businesses with employees earning compensation in excess of $1 million in a calendar year. It will require careful review of payroll structures and compliance with new filing requirements. The broad definition of compensation may cause some taxpayers to be subject to the tax.  

Actions to consider 

The Seattle Social Housing Tax introduces an additional cost for businesses operating in Seattle, particularly for those already subject to the Payroll Expense Tax. Businesses should: 

• Review payroll data to determine which employees meet the $1 million threshold. 
• Assess compliance with filing and payment obligations. 
• Consider the financial impact of this new tax when planning executive compensation structures. 

Definition of compensation 

The 5% tax applies to "excess compensation," or total annual earnings exceeding $1 million per employee. “Compensation” includes net distributions, or incentive payments, including guaranteed payments, whether based on profit or otherwise, earned for services rendered or work performed, whether paid directly or through an agent, and whether in cash or in property or the right to receive property. "Compensation" 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. 

Differences between the Seattle Social Housing Tax and the Seattle Payroll Expense Tax 

While there are some similarities between the Seattle Social Housing Tax and the Seattle Payroll Expense Tax—such as the definitions of compensation and the methods used to determine whether an employee is located in Seattle—there are several key differences. 

The most notable distinction lies in how each tax is applied: 

• Seattle Social Housing Tax: This tax only applies to compensation paid to an individual employee in excess of $1 million. 
• Seattle Payroll Expense Tax: This tax applies when two thresholds are met: 
  • The employee's annual compensation exceeds the individual threshold (currently $189,371), and 
  • The business’s total Seattle compensation exceeds the employer threshold (currently $8,837,302). 

If the business does not meet the total payroll threshold, no Payroll Expense Tax is due—even if an individual employee exceeds the individual threshold. Conversely, if the business exceeds the total payroll threshold but an employee does not meet the individual threshold, the employee’s wages are not subject to tax, although the business may still have a filing obligation. 

This creates a potential scenario where a business may not be subject to the Payroll Expense Tax (due to not meeting the employer threshold) but could still owe the Social Housing Tax if an employee earns more than $1 million in compensation. 

Another difference relates to payment timing and estimation: 

• The Payroll Expense Tax requires quarterly estimated payments for Q1 through Q3, with a final reconciliation in Q4. This is due to the uncertainty of which employees will exceed the individual threshold during the year. 
• The Social Housing Tax, by contrast, while still requiring quarterly tax filing beginning in 2026, does not require estimated quarterly payments. Tax is only due once an individual’s compensation exceeds the $1 million threshold.