The new Employer Compensation Expense Tax (ECET) — which comes into effect in the state of New York — will allow participating employers to pay ECET on the state payroll expense for employees who earn over $40,000 per annum.
As a result, employees who earn $40,000 or more may be eligible for a tax credit when filing their income tax returns.
According to the New York State Department of Taxation and Finance, employers will be required to pay a 5.0% state tax on all annual payroll expenses in excess of $40,000 per employee — phased in over three years. The rate is set at 1.5%, increasing to 3.0%, and 5.0% in the following years.
What is the ECET?
The ECET was established by the Employer Compensation Expense Program (ECEP) of New York in response to the State And Local Taxes (SALT) deduction limit that was passed in the Tax Cuts and Jobs Act of 2017. The Tax and Jobs Act placed a cap of $10,000 per year for individuals, widening tax liability between states and impacting individuals in high-tax states such as New York.
Because there is no cap on employers, the ECEP will allow electing employers to pay a portion of payroll taxes so that covered employees will not see a decline in their take-home pay.
Who is eligible?
Electing employers who choose to sign up for ECET must ensure that their employees are employed in the state of New York by meeting at least one of the following prerequisites.
An employee is employed in New York if they perform services either entirely within New York, or both in and out of New York. Those performed outside New York are incidental to the employee’s services performed within New York (for example, the services are temporary or transitory in nature or consist of isolated transactions).
2. Base of operations.
An employee is employed in New York if their base of operations is in New York. (This test cannot be met if the employee has either more than one base of operations or no base of operations.)
3. Place of direction and control.
An employee is employed in New York if the place of direction and control of the employee is in New York, and he/she performs some services within New York.
When to file and pay:
All employer elections, quarterly filings, and payments must be filed electronically.
If you are an electing employer, the ECET must be paid on the same dates as your business withholding tax payments are required to be made. If the due date falls on a Saturday, Sunday, or legal holiday, the payment is due on the next business day.
Due Dates for ECET Payment:
January 1 - March 31
April 1 - June 30
July 1 - September 30
October 1 - December 31
It's important to note that employers may not deduct or withhold a portion of a covered employee’s wages of the ECET paid. Additionally, no tax credits may be used to reduce the amount of the ECET due.
The deadline for opting in for the ECET was December 1. If you've missed the deadline, you can register for the following tax year when tax enrollment opens in October.
You can read more about the ECET on the Department of Taxation and Finance's website.