As previously reported, contained in the New York 2018–2019 Fiscal Year Revenue Article VII Legislation (S7509-C/A9509-C is a provision allowing employers to opt into the new Employer Compensation Expense Tax (ECET) that aims to protect New York individual taxpayers from increased federal income taxes resulting from the $10,000 cap on state and local tax (SALT) deductions under the Tax Cuts and Jobs Act (TCJA). (See EY Payroll Newsflash, Vol, 19, 068, 4-4-2018.)

Now, the New York Department of Taxation and Finance has issued guidance concerning the Employer Compensation Expense Program (ECEP) for administration of the ECET. (New York Department of Taxation and Finance, TSB-M-18(1) ECEP.)

Form IT-2104 to be updated

The 2019 Form IT-2104, Employee's Withholding Allowance Certificate will be updated to allow employees whose wages are subject to the ECET to adjust their tax withholding accordingly.

The Department suggests that employers:

— Tell employees that they opted into ECET.

— Encourage their covered employees to review their Form IT-2104 and adjust their withholding.

— Communicate to their covered employees at the end of the year the amount of wages subject to ECET. The department will be providing, through the department's website, a sample template that can be used to communicate such amount to covered employees.

ECET tax overview

The ECET is a tax that employers can elect to pay when they have employees who earn annual New York wages and compensation over $40,000. The rate of tax gradually increases over three years.

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.

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.

Calculating the ECET

The ECET applies only to those wages of each covered employee that exceeds $40,000 for the calendar year. If covered employees with annual wages of more than $40,000 are employed by the employer within New York for only part of the calendar year, they become a covered employee only when they are employed in New York as determined under the standards above. The electing employer will be subject to the ECET on the payroll expense paid to those part-year employees only when and to the extent the wages and compensation paid to them for employment in New York exceeds $40,000.

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.

Tax remittance and return filing

— Tax payment due date. The ECET must be paid electronically on the same dates that the electing employer's withholding tax payments are required to be made.

— Tax return due date. The quarterly ECET returns are due on the same dates as withholding tax returns as shown below:

When the due date falls on a Saturday, Sunday or legal holiday, the return and payment will be due on the next business day. There are no extensions of time to report or pay the ECET.

Opting into the ECEP

Employers interested in participating in the ECEP must make an affirmative election to participate annually by December 1 for the next calendar year. The initial annual employer election must be made no later than December 1, 2018, to participate in the ECEP for 2019.

If an election is made after the December 1 deadline, it will not take effect until the second succeeding calendar year. For example, if an employer makes an initial election on December 20, 2018, that employer will not be eligible to participate in the ECEP until calendar year 2020.

The department will be providing a web-based registration system to accommodate the employer election into the ECEP.

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EY Payroll News Flash