Why Would an Employer Opt In to New York’s New Payroll Tax?

New York recently issued a notice providing details on the state’s new payroll tax, called the optional employer compensation expense tax. But the notice did not address one important question: Why would an employer consider opting in to the tax?

Helping Employees Affected by Federal Tax Reform

The new tax provides a way for employers to potentially help their employees deal with negative effects of the federal Tax Cuts and Jobs Act. Specifically, employees may be facing a financial setback from the new federal limitation on deducting state and local taxes. This is of concern in high tax states like New York.

Employer Deduction, Employee Credit

New York prepared a report outlining a number of options for responding to the federal legislation.

The report noted that while the federal law limits the deductibility of state income taxes for individuals, employer-side taxes on payroll will remain deductible. According to the report, relying more on employer-side payroll taxes and less on personal income taxes could allow states to mitigate the negative impacts of the federal law.

In exploring possible payroll taxes, the report concluded that an opt-in model would provide flexibility for employers to help their employees adjust to the new federal tax changes. Employers electing to participate in the program would pay an entity-level compensation expense tax, with employees receiving corresponding credits to offset their individual income taxes.

New York ultimately enacted the opt-in approach as part of the 2018 budget bill.

Other Possible Incentives

The governor’s office also said that it would work with the legislature and stakeholders to design incentives to help offset the costs of implementing the tax.

IRS Treatment of New York Payroll Tax Unclear

Employers should proceed with caution in deciding whether to opt in to the new tax. One important consideration is that the IRS has not yet confirmed how it will treat the tax, including employer deductions.

Optional Employer Compensation Expense Tax, New York, July 11, 2018

By Brian Plunkett, J.D., CCHTaxGroup

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