New York State & Local Tax Update: October 2018
New York lawmakers enacted a program to potentially circumvent the Tax Cuts and Jobs Act (TCJA), which imposes a $10,000 cap on the state and local tax (SALT) deduction for individuals who itemize their deductions. This Employer Compensation Expense Program (ECEP) created an elective Employer Compensation Expense Tax (ECET) that employers can elect to pay if they have employees that earn over $40,000 annually in wages and compensation in New York state.
About the Employer Compensation Expense Tax (ECET)
An electing employer would determine on a quarterly basis if each employee, who is considered a New York employee, has earned $40,000 throughout the year by the end of the quarter.
For example, if an employer has an employee who is determined to be employed in New York and has a salary of $150,000 that is paid evenly among the four quarters ($37,500 per quarter), the employer would not have any ECET due for the first quarter since the wages have not exceeded $40,000. In the second quarter, the employer would be subject to the ECET on $35,000 of wages because that is the point at which the employee has exceeded $40,000 of annual wages.
ECET is being phased in over three years as follows:
- 1.5% in 2019
- 3% in 2020
- 5% in 2021 and after
This tax is in addition to employer wage withholding requirements. The ECET is different from the state withholding tax in that it is a payroll expense of the entity and is not deducted from the employee’s wages. Withholding can be adjusted based on the fact that the employer is participating in the program, and it is suggested that employers tell employees about the option to change withholding. Employers are encouraged to disclose to employees that the election was made and provide information regarding the amount of wages subject to ECET on an annual basis. This is important since an employee who has wages subject to ECET is entitled to a credit though the New York State Department of Taxation and Finance. To date, the department has not provided guidance on reporting or claiming this credit.
Determining a New York Employee
An employee is determined to be employed in the state of New York if at least one of these criteria is met:
- They work entirely in New York, or they work both inside and outside of New York with the outside activities incidental to their work in New York.
- Their sole base of operations is in New York.
- They are directed from an office in New York, and some services are performed in New York.
Employers must elect to participate in the ECEP annually. The election is due between Oct. 1 and Dec. 1 for the next calendar year. For example, to participate in the program for 2019, the initial annual employer election must be made no later than Dec. 1, 2018. This is a non-revocable election for the calendar year following the election. The election is made electronically through the New York Department of Taxation and Finance business online services website, and it must be renewed annually if the employer wants to continue with the program.
When to File and Pay
The ECET will be paid on the same dates that withholding tax payments are required to be made, but they must be filed and paid separate from the withholding tax. All quarterly ECET returns and payments must be made electronically.
|January 1 – March 31||April 30|
|April 1 – June 30||July 31|
|July 1 – September 30||October 31|
|October 1 – December 31||January 31 (following year)|
If the employer participates in this program, employees would have a lower state tax liability because any ECET paid by an employer would result in a corresponding New York state income tax credit to the employee. Essentially, employers – who have no cap on their business’s SALT deduction – would be assuming the cost of the employee’s state income taxes.
Aside from the benefits, there are some other factors that should be considered. While the employer will bear the additional costs associated with the ECET, the law expressly does not allow such amounts to be deducted from the employee’s wages. The additional costs will also include additional quarterly filings, with the potential for the imposition of penalties. Employers may consider methods to offset the additional expenses by reducing base wages or increasing wages at slower rates than they have historically.
Additionally, employees who work in New York but are residents of states other than New York may be negatively impacted because the resident state may not treat the ECET as a creditable income tax.
Uncertainty remains on whether the ECET would be an effective workaround for federal income tax purposes and whether or not the IRS will accept this type of program. Though specifically citing the charitable contribution programs, the IRS has issued a notice indicating its intention to question state workaround programs (see IRS Notice 2018-54).
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