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The New York Department of Taxation and Finance announced that the Employer Compensation Expense Tax (ECET) rate increases as of January 1, 2021 and thereafter to 5%, up from 3% for 2020 and 1.5% for 2019. Eligible employers may enroll to participate in the 2021 Employer Compensation Expense Program (ECEP) from October 1, 2020 through December 1, 2020. Calendar year 2021 will be the third year for the program. (NYS Tax Department's Tax Professional Newsletter, 10-10-2020.)

Employers may elect to pay the ECET if they have employees who earn wages over $40,000 each year and have compensation attributable to New York. Employers that elect into the ECEP for the year pay the ECET on employees' total New York wagesthat exceed $40,000 for the calendar year.

The ECEP law was enacted as part of the New York 2018–2019 budget and allows employers to opt into the program 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 federal Tax Cuts and Jobs Act (TCJA).

Employers are encouraged to sign up for updates to the program.

ECEP participation is voluntary, but locked in for the year once employer enrolls

The Department reminds employers that they are not required to participate in the ECEP, but once enrolled employers may not revoke their election for the entire calendar year.

Employers must pay the ECET on all covered employees and must file all four quarterly ECET returns. Employers make an ECET election using the Department's Business Online Services account.

Employers that elect to participate should communicate their participation to covered employees and tell them that they may be eligible for a tax credit on wages over $40,000 when filing their income tax return. Employers are encouraged to inform employees at the end of the year the amount of their wages subject to ECET. Employees should review their Form IT-2104,Employee's Withholding AllowanceCertificate, to adjust their withholding to account for the ECET credit.

If an ECET 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 21, 2020, that employer will not be eligible to participate in the ECEP until calendar year 2022.

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 increased 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, an employee is deemed to be employed in New York.

Once a covered employee's wages exceed $40,000, the employer must begin remitting ECET payments. The ECET is paid on the same dates that New York income tax withholding tax payments are required to be made. ECET quarterly returns are due at the same time as New York income tax withholding returns; however, ECET payments and returns are submitted separately from New York income tax withholding returns.

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 for partial-year coverage

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 covered employees 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.

See the Department's notice TSB-M-18(1) issued July 3, 2018, for examples of how the ECET is calculated.

For more information on the ECET, see the Department's website.

See also the IRS final regulations regarding state and local tax credits.

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