The Senate’s revenue package includes a payroll tax of 5% on large employers with $7 million in payroll expenses, including cities and other local governments. (SB 5796) This proposal and the other bills in the revenue package to bridge the state’s budget gap and fund the recently released budget proposals will be heard in the Senate Ways & Means Committee on March 31.

The tax would apply to employers with $7 million in payroll expenses on wages above the Social Security threshold, which is currently $176,100.

The definitions of wages and employers are the same as those used for state paid family & medical leave. (RCW 50A.05.010) Wages include all compensation, but exclude payments like tips, benefits like health insurance and retirement, and per diem travel expenses.

The definition of employers includes:

• Any individual or organization having any person in employment;
• the state, state institutions, and state agencies; and
• any unit of local government including, but not limited to, a county, city, town, municipal corporation, quasi-municipal corporation, or political subdivision.
• Employer does not include the federal government.

Cities should be aware that this definition of employer means that the tax would also apply to cities with payroll expenses over $7 million per year. Based on State Auditor data for wages and salaries in 2023, about 28% of cities would have payroll expenses over $7 million, but the tax would likely only apply to a small number of positions that have salary ranges that exceed the wage threshold.

Payments made by employers for Seattle’s payroll tax would be credited against any taxes due to the state.

Seattle’s payroll expense tax has different thresholds and adjustable tax rates of 0.75% to 2.5%, based on the total payroll and total wages above the threshold. The Seattle payroll expense tax applies to businesses operating in Seattle with total payroll of $8,837,302 and at least one employee with $189,371 in wages in 2025. These thresholds are indexed to annual CPI inflation rates.

AWC has not taken a position on this revenue proposal, but we will attend the hearing to testify in support of another bill in the Senate revenue package scheduled for the hearing, AWC’s priority bill to lift the property tax cap.

Date to remember

SB 5796 is scheduled for a hearing in the Senate Ways & Means Committee at 4 pm on Monday, March 31.