If you’re an employer in the state of New York, you may have heard of the new payroll tax beginning in 2019. But, did you know that this new Employer Compensation Expense Tax (ECET), established by the Employer Compensation Expense Program (ECEP), is optional?
Although you aren’t required to pay the ECET, you may choose to do so. Read on to learn more about the New York state payroll tax to help you decide if you want to participate.
What is the ECEP?
The ECEP is a state program that established the Employer Compensation Expense Tax. Employers can elect to pay the ECET for New York employees who earn over $40,000 annually. Contributed funds help employees cover the high costs associated with state and local income taxes. New York established the ECET as a response to the Tax Cuts and Jobs Act of 2017.
The Tax Cuts and Jobs Act limited itemized deductions that individuals can claim for state and local income taxes to $10,000, affecting employees in high-tax states such as New York. Businesses, on the other hand, do not have a deduction limit.
If you decide to participate in the Employer Compensation Expense Program, you need to register. After registering, you must pay the tax for each qualifying employee.
Participating employers pay a percentage on the employee’s income, earned while working in New York, in excess of $40,000. And, employers are responsible for filing and depositing their contribution quarterly.
You cannot withhold any part of the ECET rate from your employees’ wages. ECET is strictly an employer-only tax.
The ECET rate is set at 5% for calendar years 2021 and beyond. However, the ECET rate is 1.5% for 2019 and 3% for 2020 to gradually acclimate employers to the tax.
You will only pay the ECET rate on an employee’s wages after they earn $40,000. The first $40,000 are not subject to the ECET. If the employee doesn’t earn more than $40,000 during a quarter, do not pay the tax for that quarter.
Only pay ECET tax for employees who work in New York. If an employee works part-time in New York and part-time in another state, only calculate the ECET for the time the employee works in New York. Do not pay ECET if the employee’s wages for work in New York are $40,000 or below.
Take a look at the following examples to learn how to calculate the Employer Compensation Expense Tax for 2020.
For each example, you will use the 2020 rate of 3%.
Example 1: NY employee year-round, earns $100,000 per year
Let’s say your employee works exclusively in New York.
To find the total amount you will contribute, first subtract $40,000 from $100,000 to get $60,000. You will pay 3% of their taxable wages, which are $60,000.
Next, multiply 3% by $60,000 to get your total contribution of $1,800. Your annual ECET liability is $1,800 for this employee. You must make quarterly payments totalling $1,800 for the year. So, what are your quarterly contribution amounts?
To determine your quarterly contributions, divide the employee’s annual wages by four ($100,000 / 4 = $25,000). Your employee earns approximately $25,000 per quarter.
Because the employee’s first quarter earnings of $25,000 are less than $40,000, do not contribute in quarter one.
In the second quarter, the first $15,000 of the employee’s $25,000 earnings are not subject to the ECET ($25,000 quarter one + $15,000 quarter two = $40,000). During the second quarter, you will only pay the ECET on $10,000 of the employee’s wages ($25,000 – $15,000).
Take a look at how much your quarterly payments for your $1,800 annual liability would be:
- Quarter 1: $0
- Quarter 2: $10,000 X 0.03 = $300
- Quarter 3: $25,000 X 0.03 = $750
- Quarter 4: $25,000 X 0.03 = $750
Example 2: NY employee year-round, earns $200,000 per year
Let’s say your employee earns $200,000 per year.
First, calculate the employee’s earnings which are subject to the ECET ($200,000 – $40,000 = $160,000). Now, calculate your annual ECET liability ($160,000 X 0.03 = $4,800). Your annual ECET liability is $4,800.
Next, determine the employee’s quarterly earnings ($200,000 / 4 = $50,000). The employee’s quarterly earnings are $50,000.
Because the employee earns $10,000 more than $40,000 in quarter 1 ($50,000 – $40,000 = $10,000), you will contribute ECET each quarter.
Here’s how your quarterly payments would be split up:
- Quarter 1: $10,000 X 0.03 = $300
- Quarter 2: $50,000 X 0.03 = $1,500
- Quarter 3: $50,000 X 0.03 = $1,500
- Quarter 4: $50,000 X 0.03 = $1,500
Example 3: NY employee half-year, earns $75,000 per year
Your employees works in New York for six months and in Pennsylvania for six months. They earn an annual salary of $75,000.
To determine whether you need to contribute ECET, divide their annual salary by two to find out how much they earn for their work in New York ($75,000 / 2 = $37,500).
The employee earns $37,500 for their work in New York. You do not need to pay ECET for this employee.
Example 4: NY employee half-year, earns $150,000 per year
Now, let’s say an employee working in New York for six months and Massachusetts for six months earns $150,000 annually.
For their time in New York, they earn $75,000 ($150,000 / 2). The employee earns $35,000 over $40,000 ($75,000 – $40,000), meaning you will contribute ECET on $35,000 of their wages.
Your annual ECET liability for the employee is $1,050 ($35,000 X 0.03).
How you can elect to participate in ECEP
Because the program is optional, you will not be automatically enrolled. If you want to participate in the Employer Compensation Expense Program, you will need to register online.
To register, you must log in to your NY Business Online Services account. From there, you can navigate to the Services menu, then Employment and withholding tax, and finally the ECEP Employer Election option.
You must sign up during the enrollment period to participate in the following year’s program. The enrollment period takes place annually from October 1 – December 1. The deadline to participate is December 1 each year.
Who can elect to participate depends on your business entity:
- Corporations: Authorized officer or manager
- Non-corporations (e.g., sole proprietorship or partnership): Any member, owner, or other individuals with the authority to sign returns
Once you elect to participate, you are required to pay the tax for the applicable calendar year. Failing to pay or file on time (or at all) can result in penalties.
Notifying your employees
After electing to participate in New York’s Employer Compensation Expense Program, you need to notify your employees.
After telling employees you will contribute the ECET, ask if they want to review their state income tax withholding allowances. When you pay the ECET, your employees may need to adjust their allowances. The 2020 version of New York’s state W-4, Form IT-2104, lets employees claim additional allowances if their employers pay the ECET.
At the end of the year, let employees know how much you paid during the year for ECET. You should document their total wages, wages subject to the tax, and how much you contributed.
How to file and deposit the Employer Compensation Expense Tax
You must file and deposit ECET contributions quarterly.
Don’t file and pay your ECET with your other withholding tax. You must make a separate online payment and filing for the Employer Compensation Expense Tax.
Filing and payment due dates
Although you cannot file and pay your ECET with your other withholding tax, the filing and payment due dates are still the same.
ECET contribution payments are due when your withholding tax payments are due.
File your ECET returns on the same dates you file your withholding tax returns, which are:
- Quarter 1 (January 1 – March 31): April 30
- Quarter 2 (April 1 – June 30): July 31
- Quarter 3 (July 1 – September 30): October 31
- Quarter 4 (October 1 – December 31: January 31
For more information on the Employer Compensation Expense Program, visit New York’s website.
Have you decided to participate in the Employer Compensation Expense Program? Don’t stress about calculations. Patriot’s online payroll software will calculate your ECET liability so you don’t have to. Get your free trial today!
This is not intended as legal advice; for more information, please click here.