SALT Strategies

New York Employers: Is the Employer Compensation Expense Tax A Trick or Treat?

In April of this year, New York Governor Cuomo signed the 2018-2019 Fiscal Year budget. The Budget adopted the Employer Compensation Expense Tax (ECET) in an attempt to offset the Tax Cuts and Jobs Act (TCJA) $10,000 state and local tax (SALT) deduction limitation and its potential negative effect on individual taxpayers in the state.

An employer may annually elect to participate in the Employer Compensation Expense Program (ECEP) which will result in the employer paying the ECET for covered New York employees on compensation paid above $40,000. In order for the ECET to be applicable for 2019, the employer must make this election by December 1, 2018.

For employers considering electing the ECET by participating in the ECEP the time to determine whether the ECET is a trick or treat for such employers is NOW!

Employer Compensation Expense Tax {ECET} – Some Basics

How Does The ECET Work?

The ECET provides for a new optional tax to be paid by employers on specific payroll expenses paid by those employers that elect to participate in the ECEP and be subject to the ECET on “covered employees”. An employer that so elects will pay the ECET on the payroll expense incurred by the employer for New York wages and compensation that exceeds $40,000 for the calendar year paid to each employee who is employed in New York for whom the employer is required to withhold New York State tax.

The ECET is a deduction to the employer for determining the employer’s federal taxable income. The benefit to the covered employees of employers that elect the ECET is a credit against the employees’ New York State personal income tax equal to the ECET paid by employer.

The ECET Election and Tax Rate

An employer may annually elect to participate in the Employer Compensation Expense Program. The first applicable year for the ECEP is 2019. If an employer wishes to elect into the ECEP for 2019, an employer must timely elect by December 1, 2018. The ECET tax rate is 1.5% for 2019. The ECET rate increases to 3% in 2020, and 5% in 2021 and thereafter.

Some ECET Specifics

The determination to elect the ECET requires some significant analysis by employers. Furthermore, this election must be made by December 1, 2018. To help with this analysis the state issued TSB-M-18(1)ECEP.

In addition, the following key aspects of the ECET may be helpful to employers considering whether to participate in the ECEP and elect the ECET:

  • ECET applies only to the payroll during the calendar year attributable to an employee in excess of $40,000.
  • Employers are prohibited from deducting from an employee’s wages or compensation any amount that represents the ECET tax.
  • ECET payments are due at the same time as withholding payments are remitted.
  • An employer will make their election using their Business Online Services account. See Employer Compensation Expense Program (ECEP) Employer Election.
  • The ECET election must be made by December 1 of the year prior to the year for which the employer wishes the election to be effective. Elections made after December 1 would take effect in the second succeeding calendar year. Elections made after December 1, 2018 will be applicable to 2020.
  • An electing employer is only subject to the payroll tax on the payroll expense paid to any covered employee during the calendar year that is in excess of $40,000.
  • A ‘covered employee’ is an employee who must have amounts withheld under NY Tax Law Section 671 and receives annual wages from his or her employer in excess of $40,000.
  • All requirements under the ECEP, including employer elections, quarterly filings, and payments, must be filed electronically.

Once an employer makes the ECET, the employer should communicate to its employees:

  • The ECET was elected for the year;
  • That covered employees making over $40,000 may be eligible for a tax credit when filing their inome tax return and should review their IT-2104, Employee’s Withholding Allowance Certificate to adjust their withholding; and
  • The amount of wages subject to ECET for the year.

But Wait! The ECET May Have Broader Issues Employers Should Consider

Employers thinking about participating in the ECEP and electing the ECET may have additional nontax considerations that require further analysis.

  • Does the ECET, since it is not applicable to non-New York employees, but arguably creates an economic benefit to covered New York employees, result in income or a benefit to some of employers’ employees, i.e. the New York covered employees, but not to other employees, i.e. non-New York covered employees?
  • Does this benefit to some of the employer’s employees arising from ECET result in a violation or conflict with an employer’s collective bargaining agreement that covers both New York and non-New York employees?
  • Do employers considering the ECET have any deferred compensation plans that may be affected by electing the ECET in that the ECET may be deemed to provide a benefit to New York covered employees in a manner that is disproportionate to non-New York employees thereby creating an issue or conflict with the deferred compensation plan?
  • Will the Treasury respect the ECET as a deductible employer payroll tax or issue guidance requiring the ECET to be added back in determining the employer’s federal taxable income?

The New York ECET – Trick or Treat – Still Confused?

As every employer’s circumstances may vary significantly, employers should not waste any time in commencing their ECET analysis and having discussions with their counsel and tax advisor as to whether the ECET is the right choice for them. The ECET election date of December 1, 2018 is just around the corner!

Still not certain whether the ECET is a trick or treat? Contact your MWE advisor today.

Read: New York State Budget Tax Provisions’ Response to Federal Tax Cuts and Jobs Act