We previously reported in the Tax Alert: New York Governor Cuomo Signs Budget Bill as Part of the State’s Initiative to Fight Back against the Federal Tax Plan details of New York’s new Employer Compensation Expense Program (ECEP). New York has recently released additional information regarding the ECEP.
BACKGROUND ON THE EMPLOYER COMPENSATION EXPENSE PROGAM
The Employer Compensation Expense Program (ECEP) established a new optional Employer Compensation Expense Tax (ECET) that employers can elect to pay if they have employees that earn over $40,000 annually in wages and compensation in New York State. The ECET is being phased in over three years beginning on January 1, 2019 according to the following schedule:
• Tax Year 2019 – 1.5%
• Tax Year 2020 – 3.0%
• Tax Year 2021 and after – 5.0%Employers that volunteer to participate would be subject to the tax on all annual payroll expenses in excess of $40,000 per employee.
DETERMINING EMPLOYEE WAGES COVERED BY THE ECET
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. The tests for determining whether an employee is employed in New York are the same tests used to determine whether an employee is employed in the Metropolitan Commuter Transportation District (MCTD), substituting New York State for the MCTD as the relevant geographic area. If at least one of these tests is met, then an employee is deemed to be employed in New York.
1. Localization – An employee is employed in New York if the employee performs services either entirely within New York; or both in and out of New York, but 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 the employee’s 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 the employee performs some services within New York.
CALCULATING THE ECET
An electing employer is only subject to the ECET on the New York payroll expense paid to each covered employee that exceeds $40,000 for the calendar year. If an employee is employed in New York for only part of the calendar year, the employee becomes a covered employee only when he or she is employed in New York as determined under the standards above. The electing employer will be subject to the ECET on the payroll.
Here are three examples provided by New York:
Example 1: An electing employer has three employees. Two of the employees earn less than $40,000 annually. The third employee earns $120,000 annually ($30,000 each quarter). The third employee is not a covered employee for the purpose of the first quarter ECET filings, but at the time in the second quarter when the employee’s total wages to date exceed $40,000, the employee is deemed a covered employee and the employer is subject to the ECET. Therefore, the employer must pay $1,200 in ECET for tax year 2019, as shown below:
2nd quarter $20,000 × 1½% = $300
3rd quarter $30,000 × 1½% = $450
4th quarter $30,000 × 1½% = $450
Example 2: Employee X receives an annual salary of $300,000 from an electing employer. Employee X is employed by an electing employer in California from January 1 until November 30. On December 1, Employee X is transferred to New York State and is then employed by the electing employer in New York. Employee X received $275,000 in wages while employed in California and $25,000 in wages while employed in New York. The electing employer is not required to pay ECET on the payroll expense paid to Employee X because Employee X’s wages in New York did not exceed $40,000.
Example 3: Employee Y receives an annual salary of $250,000 from an electing employer. Employee Y is employed by an electing employer in Georgia from January 1 until August 31. On September 1, Employee Y is transferred from Georgia to New York State and is then employed by the electing employer in New York. Employee Y received $150,000 in wages while employed in Georgia and $100,000 in wages while employed in New York. The electing employer is required to pay ECET on the payroll expense paid to Employee Y while employed in New York that exceeds $40,000. The electing employer will be required to pay ECET on $60,000 of wages paid to Employee Y while employed in New York because Employee Y’s New York wages exceeded $40,000.
PAYINGTHE TAX AND FILING THE QUARTERLY RETURNS
The ECET must be paid electronically on the same dates that the electing employer’s withholding tax payments are required to be made. The quarterly ECET returns are due on the same dates as withholding tax returns as shown below:
|January 1 – March 31
|April 1 – June 30
|July 1 – September
|October 1 – December 31
||January 31 (following year)
An employer may not deduct or withhold from an employee’s wages any portion of the ECET paid. Additionally, no tax credit(s) may be used to reduce the amount of the ECET due from an electing employer.
All requirements under the ECEP, including employer elections, quarterly filings, and payments, must be filed electronically.
There will be no changes to the withholding tables for employers who elect to participate in ECEP. However, the 2019 Form IT-2104, Employee’s Withholding Allowance Certificate will be updated to allow employees subject to the ECET to adjust their tax withholding accordingly.
EMPLOYER ACTION REQUIRED
Employers should notify their employees they have opted into ECET and encourage covered employees to review their current Form IT-2104 and adjust their withholding. At the end of the year, employers should communicate to their covered employees the amount of wages subject to ECET.
Thank you for choosing Paylocity as your Payroll Tax partner. Should you have any questions please contact your Paylocity Account Manager.
This information is provided as a courtesy, may change and is not intended as legal or tax guidance. Employers with questions or concerns outside the scope of a Payroll Service Provider are encouraged to seek the advice of a qualified CPA, Tax Attorney or Advisor.