The Seattle payroll expense tax applies to businesses with more than $9,074,409 in Seattle payroll in the prior year and at least one employee earning $194,452 or more in the current year. For 2026, rates run from 0.746% to 2.557% on the portion of an individual employee’s compensation at or above $194,452, and the tax is filed and paid quarterly through the city’s FileLocal portal.1City of Seattle. Payroll Expense Tax
Who Owes the Tax
Two conditions have to be met. Your total compensation paid to employees working in Seattle must have reached $9,074,409 or more during the prior calendar year, and you must have at least one employee earning $194,452 or more in the current year.1City of Seattle. Payroll Expense Tax Both. A company with enormous payroll but no individual employee hitting $194,452 owes nothing, and a company with a few highly paid staff but total Seattle payroll below the threshold also owes nothing.
The payroll threshold looks backward; the tax owed looks at the current year. So for 2026 you check 2025 payroll to see whether the tax applies, then apply the 2026 rates to 2026 compensation.1City of Seattle. Payroll Expense Tax The dollar thresholds adjust each year for inflation.
Independent contractors are counted more like employees than you might expect. Seattle’s definition of “employee” for this tax includes people who would otherwise be classified as independent contractors for business license tax purposes. If a contractor’s pay is already included in another business’s payroll expense, though, it is excluded from yours to avoid double-counting.
Who Is Exempt
A handful of business categories are fully exempt regardless of payroll size:1City of Seattle. Payroll Expense Tax
- Grocery businesses where at least 70% of gross sales would be exempt from Washington’s retail sales tax, including wholesalers of food and food ingredients.
- Insurance businesses and their appointed producers, preempted from city taxation under state law.
- Businesses whose only activity is selling motor vehicle fuel.
- Businesses exclusively engaged in distributing liquor.
- Federal, state, and local government entities.
Nonprofits are not on that list. A 501(c) organization that meets both thresholds owes the tax the same as any for-profit employer.1City of Seattle. Payroll Expense Tax
Deciding Which Employees Work in Seattle
Only compensation paid to employees working in Seattle counts, so how you locate each employee changes the bill. You pick one of two methods at the start of the tax year and apply it to every employee for the whole year.1City of Seattle. Payroll Expense Tax
Hours Method
Employees who work exclusively in Seattle have 100% of their compensation counted. For an employee who splits time between Seattle and elsewhere, the share of compensation counted matches the share of hours worked inside the city. An employee at 60% of hours in Seattle contributes 60% of their pay. A useful feature of this method: you can exclude anyone who worked fewer than 40 hours in Seattle during the entire year.
Primarily-Assigned Method
An employee performing more than 50% of their duties at a Seattle office is primarily assigned to Seattle, and 100% of their pay counts. For an employee not primarily assigned anywhere, the city then asks whether 50% or more of their work happens in Seattle. If that fails, the city checks whether the employee lives in Seattle. This method is cleaner for fixed office setups and rougher for hybrid workforces.
2026 Rates
The tax applies only to the portion of an individual employee’s compensation at or above $194,452. The first $194,451 of any employee’s pay is never taxed, even for a business clearly liable overall. Rates then depend on two things: the business’s total Seattle payroll and each employee’s compensation.1City of Seattle. Payroll Expense Tax
Tier 1: total Seattle payroll under $129,634,413
- Employees earning $194,452 to $518,537: 0.746%
- Employees earning $518,538 or more: 1.811%
Tier 2: total Seattle payroll from $129,634,413 to $1,296,344,131
- Employees earning $194,452 to $518,537: 0.746%
- Employees earning $518,538 or more: 2.024%
Tier 3: total Seattle payroll of $1,296,344,132 or more
- Employees earning $194,452 to $518,537: 1.492%
- Employees earning $518,538 or more: 2.557%
The lower compensation band carries the same 0.746% rate for Tier 1 and Tier 2 businesses. Rates only diverge at the top compensation band or at the largest employer size.1City of Seattle. Payroll Expense Tax
What Counts as Compensation
The definition is broad: wages, salaries, commissions, bonuses, stipends, stock grants, and gifts.2Washington State Legislature. Senate Bill 5796 – Enacting an Excise Tax on Large Employers Stock-based pay matters a lot in Seattle given how many tech employers count equity as a large share of total compensation, and stock awards go into the annual total for each employee. An employee whose base salary sits below the threshold can cross it in a year when a large grant vests.
Most filing errors happen here. Vesting stock, year-end bonuses, and one-time retention payments all count. A mid-level employee normally making $160,000 in base pay might land above $194,452 in a strong equity year.
Filing and Payment
Filing is quarterly, not annual. The 2026 deadlines are:1City of Seattle. Payroll Expense Tax
- First quarter: April 30, 2026
- Second quarter: July 31, 2026
- Third quarter: October 31, 2026
- Fourth quarter: January 31, 2027
File and pay through the FileLocal portal, which is the city’s preferred system; mail-in filing is available as an alternative.3City of Seattle. Manage Your Account Online4FileLocal. FileLocal – A Portal to e-File and Pay Business Taxes, Licenses, and Fees You will need your Seattle Business License Tax Certificate number, which every business operating in Seattle is required to hold.5City of Seattle. Business Licenses
Quarterly filing carries a wrinkle. You estimate each quarter’s liability using that quarter’s compensation, but tier placement depends on full-year totals you will not know until December. If total payroll or an employee’s annual compensation crosses a threshold during the year, expect to true up on the fourth-quarter return.
Penalties, Interest, and Records
The payroll expense tax follows the same penalty framework as Seattle’s other business taxes under SMC Chapter 5.55, and interest on underpayments is calculated using the method in RCW 82.32.050. Interest cannot be waived once assessed.6Municode. Seattle Municipal Code Chapter 5.55 – General Administrative Provisions
Penalties escalate with the type of violation. A late payment triggers a penalty under RCW 82.32.090(1). A substantial underpayment adds another. If the city finds intentional evasion, the penalty rises significantly. A business operating without the required Seattle business license faces a separate penalty on top of any tax owed, and the statute of limitations for assessments stretches to ten years for unlicensed businesses instead of the standard period.7City of Seattle. Director’s Rule 5-008
Late-filing and late-payment penalties can be canceled if you show reasonable cause and no willful neglect. Interest cannot.6Municode. Seattle Municipal Code Chapter 5.55 – General Administrative Provisions
Keep supporting payroll records for at least five years: payroll journals, employee work-location and hours documentation, stock vesting records, and the calculations behind tier placement.7City of Seattle. Director’s Rule 5-008 If you have been operating without a Seattle business license, that window opens to ten years.