New York has issued a notice explaining the employer compensation expense tax or “opt-in payroll tax,” which is part of the employer compensation expense program. The program was enacted by the 2018 budget bill in response to the Tax Cuts and Jobs Act limit on the state and local tax deduction. Employers can elect to pay the tax if they have employees earning over $40,000 a year in wages and compensation in New York.
Rates for the Opt-in Payroll Tax
The tax phases in over three years:
- 1.5% in 2019;
- 3% in 2020; and
- 5% in 2021 and after.
New York Employee Tests
The tax applies to the employer’s payroll expense paid to each New York employee that is over $40,000.
An employee is employed in New York if one of three tests are met.
An employee works in New York if he or she performs services:
- entirely within the state; or
- partially in the state, if the out-of-state services are incidental to the in-state services.
Base Of Operations Test
An employee works in New York if their base of operations is in the state.
Place Of Direction And Control Test
An employee works in New York if:
- the employer’s place of direction and control is in the state; and
- the employee performs some services in the state.
Part-Year Employment In New York
For a part-year employee, the tax applies when the wages and compensation paid for employment in New York exceed $40,000. The notice provides examples illustrating how tax is calculated for part-year employment in New York.
Payments And Quarterly Returns
Electing employers must pay the tax electronically on the same dates that the employer’s withholding payments are due. Employers must file quarterly returns by the same due dates that apply to withholding returns.
Election to Opt-in to Payroll Tax Program
Employers must elect to participate in the employer compensation expense program annually. The election is due by December 1 for the next calendar year. For example, the initial annual employer election must be made no later than December 1, 2018, to participate in the program for 2019.
New York will provide a web-based registration system for the employer election.
Effect of New Tax on New York Withholding
New York will not change the withholding tables for electing employers.
But the state will update the 2019 Form IT-2104 to allow employees with wages subject to the new tax to adjust their income tax withholding.
Employers may not deduct or withhold any portion of the tax from an employee’s wages.
TSB-M-18(1)ECEP, New York Department of Taxation and Finance, July 3, 2018, ¶409-288