New York State’s Employer Compensation Expense Program
Provides Workaround to the $10,000 Limited SALT Deduction

Under the Employer Compensation Expense Program (ECEP) adopted in the State of New York in 2018, employers can elect to pay a fixed percentage of employee wages above $40,000 as tax, and likely reduce or hold down compensation by the same amount. Employees receive a credit for the amount of the payroll levy against their state income taxes, and the entirety of the payroll tax is exempt from federal income tax.

Approximately 300 businesses have opted into the program for 2020, up from 262 that participated in 2019, the first year of its existence. This still represents less than 0.1% of New York employers. The program was enacted  in response to the 2017 federal tax overhaul, a part of which capped at $10,000 the amount of state and local taxes (SALT) a taxpayer could deduct from their federal income.

The rate of tax is one and a half percent for 2019; three percent for 2020 and five percent for 2021 and after. The tax is collected at the same time and in the same manner as withholding tax on wages. There are penalties for non-filing or late filing of returns and interest will accrue on any underpayments.

The employee’s state personal income tax is reduced below the $10,000 SALT deduction cap and frees up space for deducting at least a portion of his or her real property taxes. Additionally, the employer would be entitled to a deduction on its return for the additional taxes paid; thereby shifting the individual capped SALT deduction to a fully deductible business expense.

Electing employers should communicate the implications of the tax to employees. Employers may not deduct the ECEP from the wages of employees but that they may, in some circumstances, be able to adjust the wages of employees to account for the tax benefit.

Once the employer opts-in to this elective payroll tax, it will apply to every employee earning more than $40,000, even if this state and local tax deduction limit workaround would not benefit the employee. In addition, it is likely the Internal Revenue Service will closely examine this and other state ‘work arounds’ and may eventually issue guidance casting doubt on the destructibility of the ECEP or tax implications for the employees.

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