Wayne K. Berkowitz, CPA, J.D., LL.M.
11.08.2018 | Client Alert
Participation and Election
As a possible workaround to the limited SALT deduction, employers considering participation in the New York State Employer Compensation Expense Program for the 2019 calendar year must do so by December 1, 2018.
The program establishes a new optional Employer Compensation Expense Tax (ECET) as an alternative workaround to the limited SALT deduction for federal individual income tax purposes. Employers electing to participate for 2019 are subject to a 1.5% payroll tax on employees earning more than $40,000 for whom the employer is required to withhold NYS State tax.
Mandatory electronic filing is required for all elections, quarterly filings, and payments. Employers can do so through their NYS Business Online Service accounts at https://www.tax.ny.gov/online/bus.htm. The election is annual and must be made by December 1 of the preceding calendar year.
How the Program Works
The ECET is a tax employers can elect to pay if they have employees that earn over $40,000 in wages and compensation in New York State. An employee is eligible if either the base of operations or the place of direction and control is located in New York. The tax is being phased in over three years with a 1.5% rate in 2019, 3% rate in 2020 and 5% in 2021 and thereafter. Wages are not subject to the tax until they exceed $40,000 annually per employee. Employees will receive a credit against their New York personal income tax obligation for a portion of the ECET paid by the employer.
Why Would an Employer Choose To Elect?
Many employers may in fact choose not to elect to pay the ECET. The program requirements clearly state that an employer may not deduct or withhold from an employee’s wages any portion of the ECET paid. What this means is that employers are required to make quarterly payments of the ECET and make no reduction or additional withholdings from employee wages. As a result, employers can be out-of-pocket for the additional expense, at least for the first year of participation. While it is unclear as to whether future pay increases can be “adjusted” (decreased) for the ECET paid by the employer, this would certainly seem to be the approach electing employers would need to take.
Nevertheless, creation of the ECET provides a workaround to the limited SALT deduction by allowing employers to elect to pay a payroll tax expense for employees. While the Internal Revenue Service has disavowed other workarounds to the state tax itemized deduction limitation, many believe that the expense of the tax will be deductible by the employer and the employee will receive the appropriate credit. This however, is still not a certainty.
Once elected, the tax applies to all employees over the wage threshold. Employees will not benefit if they do not itemize deductions on their personal income tax return and employers often have no way of knowing this. Additionally, employment contracts and collective bargaining agreements may present further obstacles to participation. Employers are also exposing themselves to additional estimated payment requirements along with all the requisite filings and penalties and interest for underpayments.
ECET in Operation
The credit is equal to a covered employee’s wages in excess of $40,000, multiplied by the applicable ECET rate, times one minus a fraction of the employee’s personal tax liability prior to any credits over the employee’s taxable income for the applicable year.
An employee with an annual salary of $200,000 having a tax liability of $15,000 before credits, would be entitled to an income tax credit equal to $7,400 [$160,000 x 5% x (1 -$15,000/$200,000)] once the ECET is fully phased-in.
The employee’s state personal income tax is reduced below the $10,000 SALT deduction cap and frees up space for deducting at least a portion of his or her real property taxes. Additionally, the employer would be entitled to a deduction on its return for the additional taxes paid; thereby shifting the individual capped SALT deduction to a fully deductible business expense.
Electing to participate in the Program must be carefully considered. Contact Wayne Berkowitz at 212.331.7465 | email@example.com or reach out to your Berdon tax advisor.
Berdon LLP New York Accountants