United States

Washington State: New Seattle “Hours” Tax Effective January 1, 2019

Jun 04, 2018
From KPMG TaxWatch

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Under a recently-passed ordinance, effective January 1, 2019, a new “employee hours” tax is imposed on every person for the act or privilege of engaging in business activities within the City of Seattle. The tax will be due on a quarterly or annual basis, depending on how the taxpayer files and pays their City business license tax or B&O tax. The measure of the new hours tax is the number of hours of work conducted within the City by employees during each quarter of the calendar year. For purposes of the new tax, members of limited liability companies, professional limited liability companies and partners are considered employees. The amount of the tax is equal to the employee hours worked in the City multiplied by the rate of $0.14323 per hour. Excluded from the calculation of employee hours are vacation time and sick leave hours. If an employee works both within and without the City, the business must calculate and report the number of hours worked in the City. There is an alternative full-time equivalent method that can be used to calculate the hours tax and this method generally works out to imposing tax at a rate of $68.75 per full-time equivalent per calendar quarter or $275.00 per year. The new tax is not imposed on every business in Seattle; it generally applies only to businesses that have $20 million or more of taxable income in Seattle as determined for purposes of the Seattle business license tax, which generally equals gross income after deductions and apportionment. There are also certain exemptions from the tax including, among others, exemptions for businesses that are exempt from taxation by cities under federal or state law; nonprofit organizations; certain insurance companies; hospitals; and other business primarily engaged in the provision of comprehensive healthcare services that provide at least 25 percent of their services to Medicare and Medicaid patients, or patients that have no third-party payor.

The enacting ordinance specifically provides that the hours tax is intended to be part of the operating overhead of affected businesses and should not be construed as a tax upon a businesses’ customers. Currently, the hours tax is in effect through December 31, 2023. At that point, the City will determine whether to continue the tax and, if so, at what rate. The revenues raised from the new tax are earmarked to construct new, affordable housing units with the hopes of alleviating Seattle’s growing homeless problem. Efforts are already underway to gather enough signatures to get a repeal of the new tax on the November ballot. Please contact Jonathan Drugge at 206-913-4422 or Michele Baisler at 206-913-4117 with questions.

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The following information is not intended to be "written advice concerning one or more federal tax matters" subject to the requirements of section 10.37(a)(2) of Treasury Department Circular 230.

The information contained herein is of a general nature and based on authorities that are subject to change. Applicability of the information to specific situations should be determined through consultation with your tax adviser.