New York Establishes Employer Compensation Expense Program
The Tax Cuts and Jobs Act (TJCA) limits itemized deductions for state and local income taxes for individuals to $10,000 per year. This SALT deduction limit will have a significant impact on states where there is a high tax rate such as New York, New Jersey and California. In order to reduce the effects of this provision of the new tax law, New York has enacted the Employer Compensation Expense Program (“ECEP”) for 2019. The TJCA limits the deductibility of state income taxes paid by individuals, however, there is no cap for ordinary and necessary business expenses paid or incurred by employers in carrying on trade or business.
How it Works
Employers that elect to be in the ECEP program will be required to pay a 5% state tax on all annual payroll expenses that are in excess of $40,000 per employee. This tax will be phased over a three year period beginning in January 2019.
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. If at least one of the tests for determining whether an employee is employed in New York is met, then an employee is deemed to be employed in New York.
- This new legislation would allow employers that have no cap on their business SALT deduction to absorb their employee’s state tax liability.
- Any lost Federal SALT deduction is shifted from the employee to the employer, who can still take the deduction for business tax purposes.
- If the employer is a part of this program, employees would have a lower state tax liability because any ECET paid by an employer would result in a corresponding NYS income tax credit to the employee. This will result in employers assuming the cost of the employees state income taxes.
- In order to reduce the cost to the employer many have discussed offering employees the ECEP tax credit in exchange for a decrease in employee salary. The new tax credit that corresponds in value to the ECEP will decrease the personal income tax on wages for those employees who would be subject to ECEP, resulting in economic benefits to the employees.
- This credit can also be available to nonresidents of New York State paying taxed based upon New York source wages, provided the New York employment tests are met.
Effect on New York State
According to the state budget office, this new program is expected to be revenue neutral. The decrease in personal income tax receipts will be mitigated by the substantial increase in ECEP revenue assuming large volume of elections into the program.. The revenue from this program can only be determined by the number of elections made. The state has not given any revenue projections at this point.
There are questions regarding the legality of this new program and questions about whether or not the IRS will accept this structure. The IRS has not yet issued any guidance on this subject, however, we anticipate IRS guidance will be released soon.
If you have questions about how New York ECEP can affect your business, contact us today!