City of Salem, Oregon Enacts New Payroll Tax

Legal Alert

The Salem City Council on July 11, 2023, approved Ordinance Bill No. 12-23, which imposes a new payroll and self-employment tax to fund community safety services. The ordinance imposes tax at a rate of 0.814 percent of an employee’s wages and a self-employed individual’s net earnings from self-employment for work performed within the Salem city limits. The term “wages” for this purpose has the same meaning as under Oregon state income tax law, and the term “net earnings from self-employment” has the same meaning as under federal income tax law.

Pursuant to the ordinance an employer, including the state of Oregon or any political subdivision of Oregon, must deduct and withhold the tax from wages paid to any employee for work performed within the Salem city limits. In the event an employer fails to deduct, withhold, or remit the tax as required, the employee is required to remit the tax. A self-employed individual is required to remit the tax directly to the city.

The ordinance provides an exemption from tax for wages earned at or below the minimum wage, and for net earnings from self-employment at or below the equivalent of annual minimum wage. It is not clear from the ordinance whether this exemption applies only to an employee or self-employed individual who earns less than the minimum wage, or whether the effect of the exemption is to tax only wages and self-employment income over and above the minimum wage. The ordinance directs a tax administrator to administer, implement and enforce the tax and grants the tax administrator authority to conduct audits and to interpret the ordinance, including by adopting administrative rules and procedures governing the administration, enforcement, and collection of the tax. This includes the authority to adopt administrative rules to specify the amount of penalties and interest that a person must pay for failure to timely pay the tax, consistent with comparable provisions of Oregon state tax law.

While the ordinance does not specify an effective date, a City of Salem staff report provides that the tax will be effective no earlier than July 1, 2024. The ordinance provides that the tax will expire on December 31, 2031, unless approved for continuation by voters.

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