On October 1, 2021 the application window to elect into New York State’s Employer Compensation Expense Tax (“ECET”) will open to all businesses with eligible employees earning New York-sourced income. The elections are due by December 1, 2021 to be eligible for the 2022 tax year.
In 2018, following the imposition of the $10,000 cap on state and local tax deductions (“SALT Cap”) under the Tax Cuts and Jobs Act (“TCJA”), New York State adopted the ECET, an elective, optional payroll withholding tax. Beginning on or after January 1, 2019, employers with eligible employees receiving more than $40,000 in New York-sourced wages, may make an annual affirmative election to participate in the ECEP. The annual election to opt-in for the following tax year is required to be made no later than December 1 each year. Opt-ins are processed through the New York State’s Department of Taxation and Finance’s online registration system.
Employers electing to pay this additional payroll withholding tax, may generate personal income tax credits for eligible employees, thereby reducing their New York personal income taxes and offsetting the impact of the SALT cap under the TCJA. An election under the ECEP generally applies to all “eligible employees.” The person authorized to make this election depends on the entity classification.
For the 2022 tax year, employers may elect to pay the ECET of 5% on all eligible employees’ New York-sourced payroll expense over $40,000, which generally includes employee’s wages and compensation that are subject to either social security or railroad retirement tax, but with no annual cap applied each year. Employers that elect into the ECEP for the year pay the ECET on employees' total New York wages that exceed $40,000 for the calendar year.
ECEP participation is voluntary, but is irrevocable for the year once an employer makes the election. Employers must pay the ECET on all covered employees and must file all four quarterly ECET returns.
An ECET election made after the December 1 deadline, will not take effect until the second succeeding calendar year. For example, if an employer makes an initial election on December 2, 2021, the employer will not be eligible to participate in the ECEP until calendar year 2023.
The program is intended as a benefit to employees of a business, to help alleviate the increased personal income tax burdens imposed by the SALT cap. Interested employers are cautioned to take note, however, that this elective tax will be an added business cost, which may not be passed onto its employees, and employers may not withhold the ECET from the employees themselves.
If you have any questions regarding this program, please reach out to Friedman LLP’s SALT team to discuss.