The State of New York is preparing its response to the Tax Cuts and Jobs Act (TCJA) that was signed into law in December 2017. Feeling pressure from many of the changes made by the TCJA, particularly due to the elimination of the state and local tax (SALT) deductions that impacted high state-tax states, Governor Andrew Cuomo’s FY 2019 budget includes several tax reform proposals designed to alleviate the increased tax burden, including increasing charitable giving opportunities, decoupling the state from the federal tax code, and creating an unincorporated business tax to provide deductibility options for pass-through entities.
Employers of all sizes, however, should take note of the proposed Employer Compensation Expense Tax (ECET). This new tax, implemented under the Employer Compensation Expense Program (ECEP) (https://www.tax.ny.gov/bus/ecep/ecepdx.htm and https://www.tax.ny.gov/pdf/memos/ecep/m18-1ecep.pdf), is designed to directly offset the elimination of the SALT deduction for individuals, but recognizing that payroll taxes remain deductible under federal tax law, the ECET system would allow employers who opt-in to pay a 5% tax on “all annual payroll expenses in excess of $40,000 per employee.” The system would be phased-in over three years beginning on January 1, 2019, and would be coupled with a tax credit for employees on their personal state income taxes, resulting in an offsetting shift in tax liabilities compared to New Yorkers’ increased federal obligations.
If the ECEP is enacted into law as currently drafted, employers desiring to participate in the ECEP must affirmatively opt-in to the program no later than December 1, 2018 via a web-based registration system set up to facilitate the program. New York is encouraging employers who elect to participate to communicate to their employees: 1) that they are electing to participate; 2) that covered employees who make more than $40,000 may be eligible for a tax credit on their income tax return for 2019 and should review their IT-2104 withholding certificate to make any necessary adjustments; and 3) the amount of wages that will be subject to ECET. Although the ECET returns are due quarterly and at the same time as your withholding taxes, they must be paid and filed separately. In addition, payments and returns must be filed online.
Further information on the proposed ECET and other proposed tax reforms can be found in the Governor’s budget linked above.
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