Seattle now layers two payroll taxes on employers: the payroll expense tax (the "JumpStart" tax), which in 2026 applies to businesses with $9,074,409 or more in 2025 Seattle payroll and taxes compensation of employees earning $194,452 or more at rates from 0.746% to 2.557%, and the Social Housing Tax, a 5% tax on each employee's Seattle compensation above $1 million with no employer minimum at all. For startups, the details cut in surprising directions: stock option exercises don't count as compensation, RSUs do, and the sourcing rules for remote and hybrid work are the biggest planning lever available. Here is how both taxes actually work, verified against the Seattle Municipal Code, the City's Director's Rule 5-980, and the City's published 2026 figures.
Tax One: The Payroll Expense Tax (JumpStart)
The payroll expense tax (SMC ch. 5.38, adopted 2020, in effect through December 31, 2040) is an employer-paid excise tax on the privilege of doing business in Seattle, measured by compensation paid in Seattle. Employers cannot deduct it from employee pay.
Two thresholds must both be met, and both adjust annually for inflation:
The employer threshold. The tax applies in 2026 only if the business had $9,074,409 or more of Seattle payroll expense in 2025. This is a cliff, not a phase-in — a business one dollar under the threshold owes nothing. Note the timing mismatch: the prior year's payroll determines whether you're subject to the tax, but the current year's payroll determines what you owe.
The employee threshold. Only compensation of employees earning $194,452 or more (2026) is taxed — but once an employee crosses that line, the tax applies to their compensation from the first dollar, not just the excess.
For businesses with total Seattle payroll under $129,634,413 — which is nearly every startup and professional firm — the 2026 rates are 0.746% on the compensation of employees earning between $194,452 and $518,537.99, and 1.811% on the compensation of employees earning $518,538 or more. Larger employers pay up to 2.557%.
What Counts as Compensation — the Startup Surprises
Compensation borrows the definition from Washington's Paid Family and Medical Leave program (RCW 50A.05.010): gross pay for personal services, including salary, commissions, bonuses, and the cash value of non-cash compensation. Employee deferrals into 401(k) and similar plans count. But the exclusions are where startup planning lives:
Stock option exercises are excluded — entirely. Per the City's own guidance, stock options and any gains from exercising them, whether ISOs or NSOs, are not compensation for this tax. But stock grants, RSUs, and PSUs are included at the value of stock transferred during the year. The consequence: an option-heavy early-stage startup's equity upside largely escapes this tax, while an RSU-heavy later-stage company gets its equity compensation pulled into the base — a real, and rarely discussed, cost difference between the two equity models for Seattle-based teams. (For the tax treatment on the employee side, see RSUs and Washington State's New Taxes.)
Pass-through owner payments count only to the extent earned for services. Payments to an owner of a pass-through entity that are not for services rendered — returns of capital, investment income, passive items — are excluded. But working owners' service-based draws are in. For professional firms — law, accounting, medicine — partner compensation is typically the bulk of the base.
Also excluded: tips, employer contributions to retirement or disability plans, and expense reimbursements.
Tax Two: The 5% Excess Compensation Tax
Separately, Seattle voters approved Proposition 1A in February 2025, creating the Social Housing Tax (SMC ch. 5.37; Director's Rule 5-981, finalized June 24, 2025): 5% of each Seattle employee's annual compensation above $1 million, effective January 1, 2025. Unlike the payroll expense tax's thresholds, the $1 million line is not indexed for inflation — so ordinary compensation growth pulls more employees over it every year. Three features make it sharper than JumpStart:
There is no employer payroll threshold — a ten-person company with one $1.2M executive owes it. It uses the same compensation-paid-in-Seattle methodology as the payroll expense tax. And it stacks on top of JumpStart: a Seattle employee earning $1.5 million can cost their employer roughly $27,000 in payroll expense tax (1.811% × $1.5M) plus $25,000 in excess compensation tax (5% × $500K) — over $50,000 of city payroll taxes for one person. The 2025 tax was due with a return by January 31, 2026; beginning in 2026, filing is quarterly.
Sourcing: Where the Planning Actually Happens
Both taxes reach only compensation "paid in Seattle" — and for hybrid and remote teams, that phrase does the heavy lifting. Each year, the employer elects one of two methods for all employees (SMC 5.38; Director's Rule 5-980):
The hours method. Compensation is apportioned by hours: 100% for employees working exclusively in Seattle; for everyone else, the fraction of their hours worked in Seattle. Employers using this method may exclude entirely the payroll of employees who work fewer than 40 hours in Seattle during the year.
The primarily-assigned method (the default). An employee's full compensation is Seattle payroll if they are primarily assigned to a Seattle business location — meaning they perform more than 50% of their duties for the year there — or, if not primarily assigned anywhere, if they perform 50%+ of their services in Seattle, or perform 50%+ nowhere and reside in Seattle.
The implications are concrete. An employee or working partner who genuinely works primarily from a home office in Bellevue, Mercer Island, or anywhere outside the city limits is not Seattle payroll under the primarily-assigned method — including for the 5% excess compensation tax, where a single correctly sourced $1M+ person changes the bill materially. Under the hours method, a hybrid workforce's Seattle payroll shrinks proportionally to actual in-office hours. The election is annual and applies to all employees — but it is made separately for each tax: per the City's guidance, a business may use the hours method for the payroll expense tax and the primarily-assigned method for the Social Housing Tax (or vice versa) in the same year, as long as each election is applied consistently for that tax. The right combination depends on the workforce's actual pattern, and it can change year to year.
Two cautions. First, this must reflect reality: the City's record-keeping requirements specifically list teleworking agreements, work location schedules, and residence records as documentation it can demand. Sourcing follows where work is actually performed, not where a memo says it is. Second, the threshold interaction matters: because the employer threshold is measured by Seattle payroll expense, correct sourcing can move a growing company below the $9.07M line entirely — at which point the payroll expense tax (though not the excess compensation tax) is zero.
What This Means for Founders
Most early-stage startups are outside both taxes: under the payroll threshold, no one over $1M, and option-based equity that doesn't count anyway. The exposure arrives with scale — a few hundred well-paid employees, RSU refreshers, executive packages — and it arrives on top of Seattle's B&O tax, which was itself restructured for 2026 (see Seattle B&O Tax 2026: Proposition 2's New Progressive Rates and the service-to-retail reclassification). The cost gap with the Eastside is real and documented — Bellevue has no comparable payroll tax — but so are the reasons companies stay. The honest framing is that this is a location-and-structure decision to make deliberately, with the numbers in front of you, rather than a surprise line item discovered at $10M of payroll.
One more planning note: these are employer taxes, and the law prohibits deducting the payroll expense tax from employee pay. For founders and executives, though, the excess compensation tax creates a genuine employer-side interest in how compensation above $1M is structured and where its recipient actually works — which belongs in the same conversation as the individual-side planning for Washington's 9.9% income tax arriving January 1, 2028.
The Bottom Line
Seattle's payroll taxes are two separate regimes with one shared sourcing rulebook. The JumpStart tax has a high entry threshold but taxes from the first dollar once an employee qualifies; the excess compensation tax has no entry threshold at all. Options are out; RSUs are in. And for any company with a hybrid workforce, the annual sourcing-method election and the documentation behind it are worth more than any other line of planning. If your company is approaching the thresholds — or already over them and computing Seattle payroll by default rather than by design — it's worth a deliberate look.
This post is for informational purposes and does not constitute legal or tax advice. Figures are the City of Seattle's published 2026 thresholds and rates, verified August 2026 against SMC ch. 5.38, Director's Rule 5-980, and the City's payroll expense tax guidance; thresholds adjust annually for inflation.
