Washington and Oregon Pose Unique Payroll Tax Challenges (1)

Managing payroll taxes in the Pacific Northwest, particularly in Washington and Oregon, presents a complex challenge shaped by unique tax structures and compliance requirements, two industry experts said May 13.

Understanding how to navigate these complexities is crucial for employers and payroll professionals to remain compliant with regulatory requirements, said Carlanna Livingstone, CPP, payroll manager at Funko, and Mindy Mayo, CPP, senior managing director at KPMG.

Livingstone and Mayo spoke at the 2025 Payroll Congress in Kissimmee, Florida.

Washington

Washington stands out as one of the few states with no state income tax, but the tradeoff comes in the form of the highest individual payroll tax deductions in the nation, Livingstone said.

WA Cares Fund

All employees in Washington are subject to an automatic contribution at a rate of 0.58% of their wages, unless they have an approved exemption, Livingstone said.

The WA Cares Fund is an employee-funded long-term care insurance program, Livingstone said.

The WA Cares Fund, while beneficial for some employees, has raised concerns among others, particularly high-wage earners and younger employees who contribute significantly but may derive limited benefits, Livingstone said.

For instance, while the WA Cares Fund provides long-term care benefits of $36,500, adjusted annually, many employees find this benefit insufficient given the high costs associated with long-term care, the Livingston said.

The law applies regardless of whether the benefit is used, and benefits are tied to Washington, Livingstone said. “If you move to a different state, too bad, because there would be no benefit for you,” Livingstone continued.*

Another challenge presented by the WA Cares Fund is that employees generally can only access the benefits after 10 years of contributing to the fund, Mayo said.

Employees must obtain an exemption letter from the state to be exempted from contributions, Mayo said. However, the exemption does not apply until the quarter after its approval, Livingstone added.

Making this program voluntary could have been a better approach, Livingstone said.

To ensure compliance, payroll professionals should regularly monitor WA Cares to verify employee exemption letters and automatically deduct employee contributions, Livingstone said.

Paid Family and Medical Leave

Washington’s paid family and medical leave program requires a total contribution rate of 0.74%, split between employers and employees, Livingstone said.

Payroll professionals must stay up to date on PFML rates and educate employees on the distinctions between the WA Cares Fund and PFML, Livingstone added.

WA Workers’ Compensation

Washington workers’ compensation program, run by the Department of Labor and Industries, is unique because it requires coverage to be purchased through the state, Livingstone and Mayo said. Rates are determined based on job risk classifications and total hours worked, Livingstone continued.

The contribution is split between the employer and employee, however, if the employer chooses to pay the employee’s portion of the tax, it is not considered imputed income, Livingstone said.

Payroll professionals must update their risk classification codes regularly, track hours worked, submit quarterly reports, and monitor rate change notices to remain compliant, Livingstone said.

Seattle Payroll Expense Tax & Social Housing Payroll Tax

Seattle adds another layer of complexity with its unique payroll taxes, including the Payroll Expense Tax and Social Housing Payroll Tax, Livingstone said. These taxes target high-wage earners and apply only to employees working in Seattle, she added.

These are two separate taxes, with unique contribution rates, eligibility rules, compliance deadlines, impacts on payroll processing, withholding requirements, and budgeting, Livingstone said.

“Payroll professionals should be careful not to confuse them or treat them as the same,” Livingstone said.

While the payroll expense tax is based on a tiered tax rate determined by employees’ wages and applies to businesses with annual payrolls exceeding $7 million, the social housing payroll tax imposes a 5% rate on wages above $1 million, Livingstone said.

Payroll professionals should clearly identify Seattle-based payroll activities and carefully track remote employee hours to ensure compliance with Seattle’s tax requirements, Livingstone said.

The intricacies of tracking employee work locations, especially for remote work, make it imperative for payroll professionals to maintain accurate records, Livingstone said.

Oregon

Oregon contrasts sharply with Washington, as it imposes both state and local taxes, which create different layers of complexity, Mayo said.

Payroll professionals in Oregon must ensure they comply with the appropriate jurisdictional regulations, as local taxes are based on the work location rather than an employee’s residence, Mayo said.

Employers in Portland Metro and Eugene are required to pay TriMet and lane transit payroll taxes, Mayo said.

Payroll professionals should deduct local payroll and transit taxes based on the wages paid to employees working in specific localities, Mayo said.

“Make sure you are taxing the employees in the correct jurisdiction,’ Mayo said. Payroll professionals can determine applicable local payroll taxes by using address locators, Mayo said.

Bridging the Gap

While Washington emphasizes long-term care and paid leave, Oregon’s focus on local tax calls for a tailored approach to payroll management, Mayo said.

As payroll professionals continue to adapt to the evolving regulations in the Pacific Northwest, it is essential to prioritize continuous training, employee education, and system automation to ensure an efficient payroll process and compliance with state and local laws, Livingstone and Mayo concluded.

(*Editor’s note: Beginning July 1, 2030, out-of-state employees who meet the necessary qualifications may be eligible to receive benefits under the WA Cares Fund program, under legislation enacted in 2024.)