What’s Happening?

Approved and certified in February 2025, Proposition 1A—the Social Housing Tax (SHT)—took effect on January 1, 2025. The SHT imposes a 5% excess compensation payroll expense tax on businesses with individual Seattle employees earning more than $1 million annually. The tax is designed to generate funds for the Seattle Social Housing Developer.

Background: PET vs. SHT

On January 1, 2021, Seattle implemented the Payroll Expense Tax (PET), which applies to businesses with a certain payroll expense from the previous year. For 2025, the total payroll expense threshold is $8,837,302, adjusted annually for inflation (with at least one employee with annual compensation of $189,371 or more).

While the SHT is independent of the PET, it builds on it by adding a chapter to Title 5 of the Seattle Municipal Code (SMC). Key similarities between the two taxes include:

• Both taxes are imposed on businesses, not employees.
• The SHT follows PET definitions (SMC 5.38.020).
• Businesses can calculate Seattle compensation using either the Hours Method or the Primarily Assigned Method (SMC 5.38.025).
• Taxable compensation can include guaranteed payments and other distributions to owners of pass-through entities.

However, key differences between the two taxes include:

• The SHT does not have an annual total Seattle payroll threshold for imposition;
• The SHT has a flat 5% tax rate, unlike PET’s tiered rate structure.
• The SHT focuses only on individual compensation exceeding $1 million, rather than total payroll expenses.
• The SHT introduces a definition for “excess compensation,” referring to annual earnings above $1 million per employee.

As with the PET, businesses must review their payroll expense to determine whether any employees earn over $1 million and are subject to the SHT.

Reporting and Compliance

Seattle City Finance is still drafting rules and designing the applicable forms. The first SHT payment, covering 2025, will be due by January 31, 2026, aligning with the PET’s fourth-quarter tax return deadline. Afterward, the SHT will be due quarterly.

The SHT is based on actual compensation paid in Seattle. Businesses must begin filing when an employee’s earnings exceed $1 million within a given year. For example, if an employee receives a bonus in Q3 that pushes their total compensation above $1 million, the business is not required to file SHT returns for Q1 and Q2 but must report and pay the tax for Q3 and Q4. The tax applies only to the excess amount. If an employee earns $1.25 million in 2025, the 5% SHT applies to the $250,000.

To determine Seattle-based compensation, businesses must elect either the Hours Method or default to the Primarily Assigned Method. This election applies for the full reporting year and must be used consistently amongst all employees.

Next Steps

For more information or assistance in preparing for the Seattle SHT, please contact Mike Roben, John Katsandres, or Caleb Allen at KOM Consulting. Our team can help assess the impact of this tax on your business and ensure compliance with reporting obligations.