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Employers in the state of New York, this one’s for you.

As you know, federal tax reform has eliminated full state and local tax deductibility for individuals (not businesses). Now, under the FY 2019 budget, you’ll be able to opt-in to a new program that would ensure your employees don’t experience a decline in take-home pay. 

The Employer Compensation Expense Program (ECEP) has established a new, optional Employer Compensation Expense Tax (ECET). As an employer, you can elect to pay it if you have employees who earn over $40,000 annually in wages and compensation in the state.

This tax is being phased in over three years:

For quarters in tax year:

The rate of tax:

2019

1.5 percent

2020

3 percent

2021 and beyond

5 percent

Determining a New York employee.

Now, let’s get into some of the finer details.

If you do choose to pay the ECET, you will pay it on the *payroll expense for employee wages and compensation that exceed $40,000 for the calendar year. What defines a New York employee? The individual must meet one of these tests:

Localization –

  • An employee performs services either:
    • Entirely in New York
    • Both in and out of New York. Services performed outside of New York are incidental to the employee’s services performed within the state. (Ex. Temporary work).

Base of operations –

An employee’s base of operations must be in New York. This means the place where the employee is continuously located, and if not, it refers to the place where the employee typically starts out to perform functions in or out of New York.

Place of direction and control –

An employee’s place of direction and control must be in New York. Place of direction and control refers to the place that the employer directs and controls employee activities. It’s not necessarily the location of the main office, but the point where basic authority over services are located.

You can find full guidance on these tests and the definition of payroll expense in this memo from the New York State Department of Taxation and Finance.

ECET payment details.

As an electing employer*, you are only subject to the ECET on the New York payroll expense paid to each covered employee who exceeds $40,000 for the calendar year. If that employee is employed for only part of the calendar year, he/she is only considered a covered employee as determined by the tests above.

*An employer that has made the affirmative annual election under Tax Law § 851.

The ECET must be paid electronically, on the same dates that your withholding tax payments are required.

Learn more.

After combing through all the finer details, you might be thinking – “OK, so what’s this mean for me?” Want more information? Check out this page on the New York State Department of Taxation and Finance.

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