Seattle’s Proposition 1A / “Excess Compensation” Payroll Tax

By Sound Payroll | December 19, 2025

In addition to the traditional payroll expense tax, Seattle passed Proposition 1A (2025).

Prop 1A, approved by Seattle voters in February 2025, added a new payroll tax on employers that pay annual compensation above $1 million to any individual employee working in Seattle. It’s separate from the existing Seattle Payroll Expense Tax.

  • Tax rate: 5% on each employee’s compensation over $1,000,000.

  • Who pays: The employer/business, not the employee.

  • Applies if: The compensation is considered paid in Seattle.

  • Effective: Tax year 2025 onward; first returns due January 31, 2026, with quarterly filings thereafter.

Year-End Considerations

  • Employers with highly compensated executives should assess whether end-of-year bonuses or equity vesting will push compensation into taxable territory under this new tax.
  • Planning timing around payouts or structuring compensation may help manage tax exposure.

You need to consider Prop 1A if your business meets the following conditions:

You engage in business in the City of Seattle
The tax applies to any “person engaging in business” in Seattle that pays excess compensation. House Our Neighbors

You pay annual compensation > $1,000,000 to at least one employee
If any employee’s total compensation (salary, bonuses, stock value, etc.) exceeds $1 million in a year, that excess amount (over $1M) may be taxable.

That compensation is considered “paid in Seattle”
This is typically determined by:

  • Where the employee is primarily assigned (more than 50 % of duties performed within Seattle), or

  • The employee’s hours worked in Seattle relative to overall hours (the “hours method”).

That means even remote or hybrid employees can trigger the tax if they’re performing enough work within Seattle. Seattle

Important distinction: You can owe Prop 1A tax even if your business does not meet the payroll thresholds of the existing Payroll Expense Tax. The two taxes are separate. A business might be below the Payroll Expense Tax thresholds but still owe the Social Housing Tax if it pays a Seattle employee over $1 M.

Examples of Who Needs to Worry

  • A tech company headquartered in Seattle with highly paid engineers or executives (each earning >$1 M)
  • A national company with remote employees who work enough hours in Seattle such that compensation is considered paid in Seattle
  • Small local business if one employee earns over $1 million and works sufficiently in Seattle

Examples That Probably Don’t Trigger It

  • Businesses with no employees paid more than $1 M annually
  • Companies with employees working mostly outside Seattle and not meeting the “Seattle paid” criteria
  • Employers who operate in Seattle but their high earners are fully remote and never counted as paid in Seattle

If your business has or might have one or more employees earning over $1 M in total annual compensation, contact us today.

Posted in Announcement