SB 5796
In CommitteeSenate
Payroll expense tax
Enacting an excise tax on large employers on the amount of payroll expenses above the social security wage threshold to fund programs and services to benefit Washingtonians.
This status may be delayed. See Action History below for the latest updates.
How does a bill become law?
- Introduced: The bill is filed and assigned a number.
- Committee: A subject-matter committee holds hearings, takes public testimony, and decides whether to advance the bill.
- Floor Vote: The full chamber (House or Senate) debates and votes on the bill.
- Opposite Chamber: The bill repeats the committee and floor vote process in the other chamber.
- Governor: The Governor reviews the bill and decides whether to sign or veto it.
- Signed: The bill has been signed into law.
AI Analysis
This bill creates a new 5% payroll expense tax on large employers in Washington for wages paid to each employee that exceed the annual Social Security wage cap. Revenue goes to the state’s general fund to support public education, health care, and social services. The tax only applies to employers with more than $7 million in annual payroll, covering about 17% of businesses in the state.
- A new 5% payroll expense tax on wages paid to each employee that exceed the annual Social Security wage cap (e.g., $168,600 in 2024).
- Exempts employers with $7 million or less in annual payroll — meaning most small and mid-sized businesses pay nothing.
- Revenue goes to the state general fund, specifically to support public schools, health care, behavioral health services, and social services.
- Allows employers to claim a credit for any payroll expense tax paid to a city that had such a tax in place as of January 1, 2024.
- Prohibits employers from deducting the tax from employees’ wages — the tax is paid solely by the employer.
- Includes standard tax enforcement tools: penalties for late or false reporting, interest on overdue taxes, liens, wage garnishment, and asset seizure.
Who is affected
- Large employers (payroll > $7 million/year) — Large employers with annual payroll expenses exceeding $7 million will owe a 5% tax on wages paid to each employee that exceed the annual Social Security wage cap (e.g., $168,600 in 2024). This tax cannot be passed on to employees.
- Small businesses and nonprofits (payroll ≤ $7 million/year) — Small businesses and nonprofits with $7 million or less in annual payroll are fully exempt and pay nothing under this tax.
- Cities with existing payroll expense taxes — Cities that already had a payroll expense tax as of January 1, 2024, can continue collecting it, and employers can claim a credit against the state tax for amounts paid to the city.
- Washington residents who use public education, health care, and social services — The state’s general fund receives all revenue from this tax, which is then used to support public schools, health care, behavioral health services, and social services like long-term care and support for people with disabilities.
Pro/Con Analysis
Stronger case for benefits
Potential Benefits (5)
The tax is projected to raise $1.2B annually, with revenue dedicated to the general fund and used to support public schools, health care, behavioral health services, and social services—including long-term care and disability support—directly improving safety and well-being for vulnerable populations.
Public SafetyPeopleRef: Sec. 1(6), Sec. 35By exempting 83% of Washington businesses (those with ≤$7M payroll), the bill shields small and mid-sized employers—including nonprofits and sole proprietors—from a new tax burden, reducing their compliance costs and preserving jobs in local economies.
Business & EmploymentPeopleRef: Sec. 1(6), Sec. 4 (exemption for $7M or less payroll)The explicit ban on employers deducting the tax from employees’ wages protects workers from indirect wage suppression, ensuring the tax burden falls solely on employers and preserving take-home pay for hourly and salaried workers.
FinancialPeopleRef: Sec. 3(4) (prohibition on wage deductions)The tax is designed to help address Washington’s status as the nation’s second-most-regressive tax system by shifting some business taxation from gross receipts (B&O tax) toward payroll above a high threshold—making the system more progressive and supporting public school funding in line with the state’s constitutional duty.
EducationPeopleRef: Sec. 1(6), Sec. 35The credit for pre-2024 city payroll taxes preserves local revenue stability for cities like Seattle that already had such levies, avoiding double taxation and ensuring a smoother transition to the state-level system.
Local GovernmentLean peopleRef: Sec. 5 (city credit provision)
Potential Concerns (4)
The 5% payroll expense tax on wages above the Social Security cap imposes a new compliance and administrative burden on large employers, requiring them to track wages per employee against a dynamic federal threshold, file separate reports, and potentially revise payroll systems—costs that may be passed indirectly through reduced hiring or wage growth, especially in margin-sensitive industries.
Business & EmploymentIndustryRef: Sec. 3(1)The $7M payroll exemption creates a cliff effect: businesses near the threshold may restructure operations, delay hiring, or split entities to stay under the limit, potentially distorting labor markets and reducing employment flexibility for firms in the $6M–$8M range.
Business & EmploymentIndustryRef: Sec. 4 (exemption threshold of $7M payroll)Cities that had payroll taxes as of Jan 1, 2024 retain authority, but the credit is capped at the 2024 rate and does not adjust for inflation or future local tax increases—locking in inequities and limiting local fiscal autonomy going forward.
Local GovernmentIndustryRef: Sec. 5 (city credit provision)The penalty structure—equal to the tax itself plus interest—may disproportionately impact large employers facing temporary cash-flow disruptions, potentially triggering unnecessary enforcement actions and legal exposure, even absent bad faith.
Business & EmploymentLean industryRef: Sec. 7(2) (penalty = tax + interest for willful nonpayment)
Who Is Most Affected
Large employers (payroll >$7M) will pay the tax on high-earner wages, increasing their payroll tax burden; however, they benefit from a predictable, transparent rate and no wage deduction allowed, reducing legal risk and labor relations friction.
Small and mid-sized businesses (≤$7M payroll) avoid the tax entirely, reducing compliance costs and preserving capital for hiring and investment; however, they may face competitive pressure if large rivals absorb cost advantages by shifting compensation to high earners.
High-income employees (wages > Social Security cap) benefit indirectly from wage protection (no deduction allowed) and improved public services, but do not directly bear the tax; their employers may adjust compensation strategies over time.
Cities with pre-2024 payroll taxes retain authority and can collect up to the 2024 rate, but lose flexibility to increase rates independently; this preserves local revenue but entrenches past policy choices.
Residents relying on public schools, behavioral health, and social services benefit from increased, dedicated funding—especially low-income families, seniors, and people with disabilities—potentially improving outcomes and reducing long-term public costs.