New Payroll Tax Rule Offers Liability Calculation Option

By: Mackenzie Chase Posted: 07/02/2021

Get some highlights from the updated rule and find out how you can ask questions

Seattle’s Finance and Administrative Services Department (FAS) has released an updated payroll tax rule. The administrative rule was updated because in April Seattle City Council passed legislation amending the payroll tax, creating a new option for employers subject to the Seattle payroll tax to determine their payroll tax liability. 

This option, called the “hours” method, allows employers to pay taxes on the hours an employee spent working in Seattle as a proportion of the total hours the employee worked. Some highlights from the updated rule:

  • Under the “hours” method, an employer determines what compensation was paid in Seattle according to this formula:
Payroll Tax Equation
  • The “Total Hours Worked Everywhere” or the denominator in the above equation will presume that full-time employees work 1,920 hours annually. However, the rule specifies that “if actual hours worked are more than 1,920 hours or can be reasonably anticipated to be more than 1,920, the employer must be able to document the increased number of actual hours for the calculation.”
  • “Hours worked” is defined as “acting in the course of employment and includes time spent by the employee acting at his or her employer’s direction or in the furtherance of his or her employer’s business.”
  • Employers are still allowed to use the current system, called the “primarily assigned” method, where either an employee is classified as working in Seattle and an employer is responsible for paying taxes on all of the employee’s salary, or an employee is not classified as working in Seattle and no tax is due.
  • Employers will select which option they would like to use on an annual basis, which will apply to ALL of their employees - i.e., you cannot calculate the tax you owe for some employees using the “hours” method and others using the “primarily assigned” method.

The updated administrative rule includes several new examples of how the “hours” method should be applied. See Examples 7-9, 20-21, and 30.

FAS is hosting one of its monthly Payroll Expense Tax Training next Wednesday, July 7 at 10 a.m. These webinars provide an opportunity for employers to ask FAS directly about any payroll tax questions. Anyone may attend, but registration is required.

Feel free to reach out if you have questions or concerns.