Is your business structured correctly for Seattle’s new payroll expense tax? The time to review your organizational status is now.
If you are an independent contractor working in Seattle, your clients may suddenly be asking for a new Form W-9 to confirm your organization status even if you have been working with them for many years. Prospective clients may be asking if you are an LLC or an S-Corp with increasing frequency. You also may be hearing about this topic from colleagues and networking groups as well. Why the sudden increase in interest about your organizational status?
As part of the JumpStart Seattle Plan, Council Bill 119810 (CB 119810), a new payroll expense tax is in effect for businesses doing business in Seattle starting in 2021. The good news is that many small businesses are not subject to this tax because the minimum payroll required for this tax is $7 million dollars in the previous calendar year (in 2020 for the initial 2021 reporting year) and the tax is applied to employees with annual compensation of $150,000 or more in the current year. Employees and payroll expense have broader meanings for this tax than many businesses are used to.
For the purpose of this tax, an employee includes people who we generally think of as an employee as well as any individual who performs personal services or labor for the business. Compensation includes not only W-2 wages, but also payments made to individual independent contractors for personal services or labor performed, as well as distributions and guaranteed payments to owners of pass-through entities to the extent these amounts were earned for services rendered or work performed.
This tax, however, may still affect some small businesses providing services in Seattle that are sole proprietorships and are not formed as an LLC, if they mainly serve large businesses that do meet the $7 million dollar requirement because payments to independent contractors are included in the definition of “payroll expense” for the purposes of this tax. These large businesses will be more likely to ask for updated Form W-9s to confirm the status of independent contractors and may be requesting contractors to re-form as an LLC or S-Corporation so that payments to them will be exempt from this new tax.
If you are an independent contractor who receives a 1099-NEC reporting $150,000 or more for services you provide to other businesses in Seattle, this is the perfect time to consider your business formation and whether operating as an LLC or S-Corporation could be beneficial to you.
If you would like to form an LLC or want to know if operating as an S-Corporation is right for you, contact our team at Accountability Services to schedule a consultation.