New York Employer Compensation Expense Tax
By Zakariya Hussain, Staff Associate, Tax & Business Services
The New York State Department of Taxation and Finance has issued a memorandum outlining the details of the new Employer Compensation Expense Tax (ECET). The ECET is an optional tax, established by the Employer Compensation Expense Program (ECEP), which employers can elect to pay if they have employees who earn over $40,000 annually in wages and compensation in New York State.
The ECEP was enacted as part of New York’s effort to alleviate the burden on taxpayers resulting from the Tax Cuts and Jobs Act’s $10,000 limitation on state and local tax deductions. The ECET, in turn, is intended to provide relief to taxpayers by granting covered employees a credit which may be used to offset personal income tax.
The tax is being phased in over three years at the following rates:
- 1.5% in 2019
- 3% in 2020
- 5% in 2021 and subsequent years
Employers that wish to participate in the ECEP must make an annual affirmative election by December 1 to pay the optional tax in the following calendar year. Thus, the initial annual employer election must be made by December 1, 2018, for employers wishing to participate in the program in 2019. The New York State Department of Taxation and Finance will be providing a web-based registration system to facilitate the employer election into the ECEP.
Once the election is made, employers will be required to pay the ECET electronically on the same dates as the employer’s withholding tax payments are required to be made. Filing dates for the quarterly ECET returns will also mirror the due dates of the employer’s withholding tax returns.
Employers are prohibited from deducting or withholding any portion of the tax from the employee’s wages. Covered employees making over $40,000 will receive a credit when filing their personal income tax return and should review their 2019 Form IT-2104, Employee’s Withholding Allowance Certificate, which will be updated to allow employees with wages subject to the tax to adjust their income tax withholding accordingly.
It should be noted that the IRS has not yet confirmed whether employers will be able to offset their federal income tax liability by taking a deduction based on payroll taxes paid to New York State under the framework of the ECET. Until the IRS provides further clarification as to the validity of employer deductions based on the ECET, employer incentives to participate in the program will remain unclear.
For additional information regarding New York’s Employer Compensation Expense Tax and how it may affect you or your business, please contact your Marcum state and local tax professional.