United States

New York payroll tax program requires election by Dec. 1, 2018

INSIGHT ARTICLE  | 

In early spring of 2018, New York State enacted its fiscal year 2019 budget, providing early legislative responses to federal tax reform. Included in those provisions was the Employer Compensation Expense Program (ECEP), an optional employer-level payroll tax program intended to ease the burden of New York individual taxpayers subject to the state and local tax (SALT) deduction cap. Many have called the ECEP the first state “workaround” to the new limitation enacted by federal tax reform because it effectively shifts some employee state tax liability to the employer, who in most cases will not be subject to the SALT deduction limitation.

Importantly, the ECEP requires employers to submit an annual election to opt-in, which must be made by Dec. 1, 2018 for the 2019 tax year.

Program overview

The tax

The ECEP establishes a tax that employers may elect to pay. The election applies to compensation for the year subject to withholding in excess of $40,000 for each covered employee. The tax is 1.5 percent of the taxable amount for 2019, three percent for 2020, and five percent for 2021 and thereafter.  

The tax must be paid electronically on the same dates that the employer’s withholding tax payments are made.

Additionally, employees receive a tax credit based on the payroll tax, which is intended to mitigate any reductions to employee take home pay.

Qualifying employees

Electing employers pay the tax on wages and compensation exceeding $40,000 for the calendar year paid to employees located in New York and for who the employer withholds New York state tax.

The department has provided guidance on determing whether an employee is deemed to be employed in New York, using the same test as is currently used to for the New York Metropolitan Commuter Transportation District (MCTD), substituting New York State for the MCTD as the relevant geographic area. If at least one of the following tests is achieved, then an employee is deemed to be employed in New York: localization; base of operations; and/or place of direction and control.

Withholding

New York withholding tables for electing employers will remain unchanged. However, Form IT-2104, Employee’s Withholding Allowance Certificate, will be updated to allow employees whose wages are subject to the tax to adjust their tax withholding accordingly. An employer may not deduct or withhold from an employee’s wages any portion of the tax.

Mandatory election

An employer must make an affirmative election to participate in the ECEP by

December 1 in order to opt into the program for the next calendar year. The election for the ECEP’s 2019 year is due Dec. 1, 2018. Elections made after the annual December deadline will not become effective until the subsequent calendar year, e.g., an election made on Jan. 1, 2019 will not be effective until 2020. Enrollment is facilitated by an online registration system.

Takeaways and considerations

New York employers must make the election by Dec. 1, 2018 for the 2019 tax year. 

Before electing to participate in the ECEP, New York employers face a number of business and administrative considerations. For example, employers may choose to reduce future employee compensation to offset the cost to the employer. However, employers may not deduct wages or compensation for an employee that represents any portion of the tax. Revising compensation after electing into the program may also impact social security and 401(k) contributions – two issues followed closely by employees. Additionally, employers may be limited in electing into program, or by making compensation changes, by existing collective bargaining agreements.

Additional considerations include the treatment of nonresidents, who may still be eligible for the ECEP, but may not receive the same benefit as New York residents, and whether the IRS will provide additional guidance on state SALT deduction “workarounds.” Some guidance on the workarounds has already been issued.

New York employers with questions about electing into the ECEP and corresponding tax should contact their tax advisers.

 

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