- The tax is not necessarily $275 per employee. Most news outlets are reporting the annual tax as $275 per full-time employee. In fact, the actual amount may vary. The ordinance gives employers two alternative choices for calculating the amount payable: the Employee-Hours approach or the Full-Time Equivalent (FTE) approach.
- Definition of “employees” creates potential interpretation disputes: The ordinance defines an “employee” as:
“any person who performs work, labor or services for a business, is on the business’s payroll, and performs any part of their duties within the City of Seattle;”
and “payroll” to include:
“salary, wages, tips, or other draws or distributions made to employees, officers, partners, or members of [LLCs] as compensation for their labor and services.” (Emphasis added.)These definitions are unique and untested. Enforcement officials may contend that the tax applies to individuals, e.g., independent contractors and members of LLCs, who are not “employees” as defined by common law.
- The tax must be paid quarterly or annually depending on how business license taxes are paid. The tax shall be in effect during the five-year period beginning January 1, 2019 and ending December 31, 2023. Businesses must pay this new employee hours tax on a quarterly basis if they also pay business license taxes on a quarterly basis; otherwise, the new tax is payable annually. The tax may be extended beyond five years, as the ordinance directs City Council to evaluate the effectiveness of the tax by considering such factors as the rate of employment, wages, the number of new affordable housing units constructed using proceeds from the tax, the number of homeless persons in the city, and the effectiveness of service providers funded by the tax on reducing homelessness.
Final Thoughts Businesses affected by the head tax should work with experienced legal and financial advisors to ensure operations are structured for tax efficiency, particularly for those businesses paying LLC distributions, using independent contractors, or employing/contracting with persons living outside Seattle, but providing services with a nexus to Seattle.
Omar Vasquez’s practice focuses on mergers and acquisitions and debt financings, with an emphasis on the technology, restaurants, and seafood industries. Omar also has experience representing family-owned businesses, startups, and emerging growth companies in formations, corporate matters, and private equity financings. During the past two years, Omar has advised ed-tech companies and education-related nonprofits. Omar can be reached at OmarVasquez@dwt.com or directly at 206-757-8192.
Editor’s Note: On June 12th the Seattle Head Tax was repealed by Seattle City Council.