Real estate brokerages mull how to avoid Seattle’s new tax on high earners

As Seattle prepares to levy a new payroll tax on high salaries at large businesses, questions are swirling in the real estate industry about exactly how the tax will be implemented. And at least one idea has surfaced for avoiding the charge.

After the pandemic hit last year, upending the local economy and blowing a hole in the city’s budget, the Seattle City Council passed what’s known as the JumpStart tax.

The tax would be collected at companies with payroll of at least $7 million based on Seattle employees making $150,000 or more. Tax rates vary from 0.7% to 2.4%, with the highest tax rate directed at the largest companies, like Amazon.

If the tax survives an ongoing lawsuit from the Seattle Metropolitan Chamber of Commerce, it will take effect in January, with revenues set to fund affordable housing and other city programs.

A King County judge upheld the tax Friday, though the Chamber could appeal.

The tax is based not just on the salaries of traditional employees, but also payments to independent contractors.

At most real estate brokerages, agents are independent contractors who split their commissions with the brokerage at varying levels. Brokerages pass through the commissions to the agents.

At Windermere, the state’s largest residential brokerage, Co-President OB Jacobi argues that he should be able to pass the tax on to his agents.

For most Windermere agents, the company splits commissions 50/50 with agents until the agent has paid $31,000 per year, Jacobi said. Then, agents keep the full commission. If not for the commissions passed on to agents, Jacobi said, his six Windermere offices in Seattle with about 300 agents would not meet the $7 million payroll threshold.

“I don’t get the income,” Jacobi said. “It’s nuts to say you can tax somebody on something they don’t receive, period. End of story.” 

The Seattle law bars a business from making “any deductions from employees’ compensation to pay for this tax.”

Brokerages may be able to skirt the tax, however, if agents each form their own LLC or S corporation. In that setup, “a brokerage would not include payments to those entities in its payroll expense because they are not payments to employees,” the city’s Department of Finance and Administrative Services said in a statement. Each agent would have to hit the $7 million threshold to be affected.

Jacobi said that under the tax as designed, he feels “forced into telling our people to go create LLCs.” But he’s unlikely to require agents to form separate business entities, he said. 

“My goal is to educate brokers on the pluses and minuses. That’s really all we’re going to do,” he said. “I don’t want to force them into making the decision because of a payroll tax. I think that’s kind of silly.”

In total, the tax will affect about 1% of Seattle businesses, according to city estimates. The tax rate will vary based on the size of the company and salary levels. For example, a company with payroll of at least $7 million but less than $1 billion would pay 0.7% on salaries between $150,000 and $399,999 per year and a higher rate on those above $400,000 a year. With 100 people making $200,000, that would amount to a tax of $140,000.

For some agents, the tax raises questions about how their industry should participate in the city’s efforts to address housing affordability and homelessness. Home prices throughout the Seattle area have hit record highs. About 12,000 people are experiencing homelessness in King County. 

In the long term, the payroll tax revenues will be used for low-income housing, rental assistance, Green New Deal projects and other city programs, according to a high-level spending plan the council approved. Some of the tax revenues will also be used to backfill emergency spending during the pandemic.

Coldwell Banker Bain agent Roy Powell said he hadn’t heard much about the details of the payroll tax, but “everyone who’s not making $150,000 needs so much help right now,” he said. “Just pay the damn tax.”

Sol Villarreal, a Windermere agent who supported the tax, said he supports Jacobi’s call for allowing brokerages to pass the tax on to agents making more than $150,000. If they can’t, Villarreal worries brokerages could raise fees on all agents, even those not making top dollar.

“Those at the top of the game … we’re making a lot of money right now from selling homes that are becoming increasingly unaffordable to most Seattleites,” Villarreal said. “I do think it’s incumbent on us to do something. It also makes sense for whatever measures we have to be directed toward those of us doing well.” 

(Jacobi said he hasn’t yet considered whether to increase fees.)

Windermere agent Kristin Munger said she’s skeptical of the city’s efforts to reduce homelessness and prefers to donate directly to nonprofits working to solve homelessness. 

“I make great money, so it’s not about, ‘Oh, poor me.’ It’s more: Is this the right way to go about solving this huge problem we have?” she said.

At the same time, creating an LLC would add time and expense for agents already hustling in a competitive market, she said.

“I’m working seven days a week right now,” Munger said. “It’s the hardest it’s ever been in 16 years to get a buyer under contract on a house.”

Russell Hokanson, CEO of the Seattle King County Association of Realtors, said he’s focused on clarifying “how brokerages can comply with the tax as it’s currently written.” 

LLCs are “already a structure that exists in the industry for various reasons,” he said. “The Seattle ordinance may be one more factor brokers consider.”

Hokanson said the group has asked the city for clarification on several other issues with the tax, including how to calculate where brokers are doing their work. Hokanson estimates 10 to 20 residential brokerages would be affected by the tax.

As for passing on the tax to real estate agents, the Department of Finance and Administrative Services said the law “does not provide FAS the discretion to allow any taxpayers, including real estate brokerages, to pass this tax on to their employees.” That means the City Council would likely have to OK any such change.

The average real estate sales agent in the Seattle area makes about $71,000 and the average broker about $82,000, according to 2020 data from the U.S. Bureau of Labor Statistics. Other surveys put the figure higher: Indeed estimates an average pay of just under $100,000 and ZipRecruiter about $87,000.

Several other local brokerages declined to make anyone available to discuss the tax, including Redfin, where many agents are classified as employees. Redfin says nationally its agents made a median income of $112,200 last year, including bonuses and stock.

At Coldwell Banker Bain, executive vice president of operations John Deely estimates about a quarter of the company’s Seattle agents make $150,000 or more. 

Deely said he’s heard about the idea of agents creating separate LLCs and plans to look into it, though he is not sure it’s workable.

“We’re not actively looking for ways to not pay the tax. We’re trying to interpret what the tax is and see how it’s going to impact our business,” he said. 

Even if the tax is due as currently designed, “we don’t have any plans to leave the city,” Deely said.