New York State Department of Taxation and Finance released guidance on July 3rd relating to the Employer Compensation Expense Program (ECEP) that was created as a part of the 2018-19 budget package. ECEP is an optional program under which employers can elect to pay the newly created Employer Compensation Expense Tax (ECET). The ECET applies to the electing employer’s payroll expense incurred for New York wages and compensation that exceeds $40,000 per covered employee for the calendar year subject to New York withholding.
The applicable rates of the ECET phase in over the next three years as follows:
- 1.5% in 2019
- 3% in 2020
- 5% in 2021 and after
Employers choosing to participate in the ECEP must do so by making an affirmative election annually by December 1st to opt in for the next calendar year. The initial annual employer election for 2019 must be made no later than December 1, 2018 via the web-based registration system to be provided by NYS Department of Taxation and Finance.
The tax must be paid electronically on the same dates that the electing employer’s withholding tax payments are required to be made. The quarterly ECET returns are due on the same dates as the withholding tax returns. No change will be made to the withholding tables for electing employers but the 2019 form IT – 2104 will be updated to allow employees with wages subject to the new tax to adjust their income tax withholding.
Employers may not deduct or withhold any portion of the tax from the employee’s wages. Covered employees will receive a portion of the ECET as credit to offset their NYS personal income tax liability. The new credit will correspond to the value of the tax to avoid a reduction in take-home pay to the employees. Although the employer is prohibited from deducting or withholding this tax from an employee’s wages under this new law, it does not address the possibility of employers adjusting or reducing the compensation to account for the tax savings to the employee. The ECET is intended to be deductible by the employer for federal income tax purpose. It remains to be seen if the IRS will challenge the validity of the employer deductions for this new payroll tax. Further, employers are likely to face administrative challenges in the implementation of the program dealing with collective bargaining agreements, state minimum wage laws, employment contracts, etc., which will influence their participation in the program.
As a reminder: while the ECEP was one of the measures adopted by New York to reduce the impact of the $10,000 cap on the State and Local Tax deduction imposed by the federal Tax Cuts and Jobs Act; the other was the creation of two new state operated Charitable Contribution Funds one for improving healthcare and the other for improving education in New York. These funds are intended to enable the taxpayers to claim itemized deductions for their contributions to these funds on their federal and state tax returns for the current year. The tax payers will also get a credit of 85% of the contribution amount to offset their NYS personal income tax liability in the subsequent year. The budget also authorizes local governments to establish funds to receive charitable contributions and offer a percentage of those contributions as credits to offset property taxes. However, on May 23, 2018 the IRS issued Notice 2018-54 stating that it intends to propose new regulations to address the federal tax treatment of contributions to funds controlled by the state and local governments. The notice further states that substance-over-form principles will determine the tax treatment of such contributions.