Overview: As part of its 2018-2019 Budget, New York State has created the Employer Compensation Expense Program (program) in an effort to diminish the impact of the Tax Cuts and Jobs Act (TCJA) on New York state residents.
Effective Date: Employer must make an election to participate in the program by December 1, 2018
Details: As background, the TCJA limited the deduction for state and local taxes (SALT) to a maximum of $10,000 for federal tax purposes. Previously, the SALT deduction was unlimited and newly imposed limits may result in higher federal taxes where property and income taxes paid to states and localities exceed the $10,000 maximum.
Employer Provision:
The program imposes voluntary tax on employers based upon the wages paid to employees in excess of $40,000 per year. An employer would make an annual election to participate in the program by Dec. 1, 2018, for the succeeding calendar year (beginning in 2019). Under the program, the employer would pay tax, at the rate of one and a half percent for 2019; three percent for 2020; and five percent for 2021 and subsequent years on the wages of all employees in excess of $40,000 and include the Payroll Tax remittance with the withholding tax filings.
Employee Provision:
The employee would be entitled to take a credit for the amount of tax paid by the employer on his/her salary thereby reducing the New York State and local income tax. The law prohibits the employer from deducting the amount of the employer’s payroll tax from the wages or compensation of an employee: “An employer cannot deduct from the wages or compensation of an employee any amount that represents all or any portion of the tax imposed on the employer under this article.”
Together, these provisions function to allow electing employers to incur a payroll tax expense that is intended to be deductible for federal income tax purposes while reducing the employee’s state tax liability, which may be subject to the TCJA’s $10,000 limit.
Call to Action: Employers should consult with their legal and tax advisors regarding participating in New York’s Employer Compensation Expense Program.