Part of the tax law changes for 2018 and beyond is a limitation of the itemized deduction for state income and property taxes to $10,000 that can be claimed on a personal income tax return. However, there is no cap on the amount of taxes a business may deduct for employers carrying on a trade or business. New York therefore created a new optional payroll tax that employers would pay into instead of withholding coming out of an employee’s payroll. This has the effect of shifting the deduction for NYS taxes on employee’s wages to the employer’s business tax return instead of being non-deductible itemized deduction on the employee’s tax return.
A New York State employer can now elect to pay in an optional Employer Compensation Expense Tax (ECET) for employees that earn over $40,000 in wages annually in New York. The ECET is phased in over three years as follows: 2019 the tax is 1.5%, 2020 – 3% and 2021 and after 5%.
The ECET is only calculated on the New York payroll expense paid to employees on wages that exceed $40,000 per calendar year.
Example: An electing employer has three employees. Two employees earn less than $40,000 annually. The third earns $160,000 annually ($40,000 each quarter). The ECET would be calculated for any quarter when the employee has earned more than $40,000 for the year. Therefore for the first quarter, no ECET would be payable. For the 2nd, 3rd and 4th quarter ECET would be due on $40,000 x 1.5% or $600.
The ECET must be paid electronically on the same dates that withholding tax payments to employees are required to be made. Quarterly ECET returns are due on the same dates as withholding tax returns (April 30, July 31, October 31, and January 31).
An employer that wants to participate in ECET must make an election annually by December 1 to opt in for the following calendar year.
An employer may not deduct or withhold from an employee’s wages any portion of the ECET paid. Covered employees will receive a credit to use on their NYS personal income tax return to offset their income tax liability.
Please contact John Walczak with any questions. More information on this update can be found here.