Earlier this year, New York established the Employer Compensation Expense Program (ECEP) as part of the 2018-2019 New York Budget. This optional program was created to offset the Tax Cuts and Jobs Act (TJCA) of 2017, which limits itemized deductions for state and local income taxes (SALT) for individuals to $10,000 per year.
ECEP shifts a portion of employees’ state tax burden onto employers. Companies that elect to participate will pay the Employer Compensation Expense Tax (ECET) for the following calendar year for employees that earn over $40,000 a year in wages and compensation in New York State. In turn, those employees can claim that contribution as a tax credit on their NYS taxes.
Enrollment for 2019 ends December 1.
Enrollment opened Oct. 1 and employers must enroll by December 1 of the current year to take effect in the next calendar year. Employers must enroll in the ECEP program annually. If employers enroll after December 1 of the calendar year, it will take effect in the second calendar year. For example: A client enrolls on the state site on January 7, 2019, this will take effect in 2020.
How do clients enroll in NY ECEP?
Clients need to:
- Log into their New York state online services account
- In the upper left corner of their Account Summary homepage, select the Client Services Menu.
- Select Employment and withholding tax.
- Select ECEP Employer Election from the drop down menu.
- Before clients can enroll in ECEP, they must have an online account. If they don’t have an online account, they’ll need to register for one. To learn how to create an account, they can go to the Business account creationdemo on the agency website.
New York seeks to mitigate effects of federal tax reform
In establishing the optional payroll tax, Gov. Cuomo sought to protect New Yorkers from tax hikes caused by federal tax reform. In a press release in April, the governor’s office stated that the state is “disproportionally and adversely” affected by the new federal law, “which already sends $48 billion more each year to Washington than it receives in federal dollars.” It also said that eliminating the deductibility of all state and local taxes will cost New York an additional $14.3 billion.
Optional payroll tax will be phased in
New York will phase in the optional payroll tax over three years, starting Jan. 1, 2019, on employees whose wages exceed $40,000. The following schedule will be in effect:
- 5 percent in 2019
- 3 percent in 2020
- 5 percent in 2021 and after
Note: Employers that do not participate in 2019, who choose to enroll during the 2019 year for 2020, will start at 3 percent. Covered employees will be eligible for a tax credit. The bill states explicitly that state employers cannot “deduct from the wages or compensation of an employee any amount that represents all or any portion of the tax imposed.”
New York policymakers anticipate that employers opting into ECEP will lower employee wages to cover the payroll tax that businesses must pay the state. To circumvent reduced employee pay, the legislature created a new tax credit equal to ECET’s value, cutting the personal income tax for those subject to ECET.
Charitable funds support health care, education
In addition to the ECET tax credit, the New York state law also created two charitable funds – one to support health care and another for education. The intent was to enable taxpayers who itemize to be able claim fund donations as philanthropic gifts on both state and federal tax returns. Donations to these funds are also eligible for a state tax credit of 85 percent of their value, which taxpayers can claim the following year.
New York’s FY 2019 budget also allows school districts and local governments to create charitable funds. Taxpayers contributing to these funds were to receive a property tax credit equal to a percentage of the donation.
However, the Internal Revenue Service issued proposed regulations clarifying rules on deductions for charitable contributions when the taxpayer receives a corresponding state or local tax credit. The rules state that contributions made to receive state or local tax credit will reduce the Federal charitable deduction amount available to the taxpayer by the amount of the state credit. These rules are a result of states’ attempts to circumvent the limits placed on the State and Local Tax (SALT) deductions in the tax reform law.
For more information, see the official memo from New York State