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Employers Have Until Dec. 1 to Enroll in NY Optional Payroll Tax Program

Time is almost up for employers to enroll in New York state's Optional Payroll Tax Program.
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Gov. Andrew Cuomo signed into law on April 17, 2018, a provision in the state’s 2019 fiscal year (FY) budget that created the Employer Compensation Expense Program (ECEP). This program was an attempt to enable New Yorkers to sidestep the federal law that caps the state and local tax (SALT) deduction at $10,000 for those who itemize their deductions.

New York state legislators passed the changes to their tax code to reduce the burden on state residents.

The state law created an optional new payroll tax – the Employer Compensation Expense Tax (ECET) – that enables employers to pay the tax for qualified employees whose wages exceed $40,000. The employees would then be able to claim the employer contribution as a tax credit on their New York state taxes.

Enrollment opened for optional payroll tax

Enrollment opened Oct. 1 and employers must enroll by Dec. 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 Dec. 1 of the calendar year, it will take effect in the second calendar year. For example: A client enrolls on the state site on Jan. 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 starting Oct. 1, 2018.
    • 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 creation demo 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:

  • 1.5 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.

Additional resources

An earlier version of this article was published on April 30, 2018.

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Kimberley Kesselring is the Payroll Tax Compliance Manager at Paychex. She currently leads a team that is responsible for Payroll Tax Compliance.
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