The Employer Compensation Expense Program: An employer’s guide

If you have employees in the state of New York, then you need to be aware of the Employer Compensation Expense Program (ECEP).

In this article, we’ll explain what the ECEP is, who it’s applicable to, and whether it’s worth opting in. We’ll also cover what your obligations are, and how you can calculate your ECEP tax liabilities.

So let’s dive right in.

What is the ECEP?

The ECEP is a New York state program that is designed to help employers ease their tax burdens.

It is a direct response to the federal Tax Cuts and Jobs Act of 2017, which capped the amount of state and local tax deductions a business could claim. That deduction limit was $10,000, making it more expensive for companies in higher-tax states — such as New York.

The ECEP, in turn, allows employers to claim part of their payroll as a deduction on their income tax returns. Once you have joined the program, you can potentially claim 5% of any salary pay that exceeds $40,000 per year.

Note that the 5% is a direct expense for you, the employer. It’s not a deduction from your employee’s wages. However, come tax time, it can be “written off” as a tax deduction.

What’s the difference between the ECEP and the ECET?

ECET stands for Employer Compensation Expense Tax, and is the specific tax applied within the ECEP.

Is the ECEP mandatory?

No. It is entirely optional for eligible businesses.

Who is the ECEP applicable to?

The ECEP isn’t relevant to everyone. To be eligible, you must meet one of the following criteria:

• Be based in New York. If your company is legally located within New York and you have employees there, you can opt into the ECEP.

• Have employees in New York. If your company isn’t located in New York, but you have employees who are, you can opt in to the ECEP (for those employees). This includes remote workers, and employees who travel across state lines to work in New York.

Learn more about tax deductions for remote workers.

How to calculate the ECET for your employees

The ECET is the actual tax within the ECEP, and calculating it is straightforward. As the employer, you pay a set tax rate on wages paid to your employees that exceed a set income threshold. 

As mentioned, this tax rate is 5%, and the income threshold is $40,000.

To illustrate, here are some examples: 

Low-income bracket

Your employee earns $45,000 annually.

The calculation only applies to the amount over the $40,000 threshold, so the taxable amount is $5,000 ($45,000 – $40,000). 

At the 5% tax rate, the ECET due would be $250 ($5,000 x 5%).

Mid-income bracket

For an employee with an annual salary of $60,000, the taxable amount would increase to $20,000 ($60,000 – $40,000). 

At the 5% tax rate, the ECET due would be $1,000 ($20,000 x 5%).

High-income bracket

For an employee who earns $120,000 per year, the amount above the threshold would be $80,000 ($120,000 – $40,000). 

At the 5% rate, the ECET would be $4,000 ($80,000 x 5%).

It’s important to note there is no cap on the amount of ECET you might owe. This tax applies to all wages above the threshold, so ensure you plan for it accordingly. 

It’s also important to note that ECET calculations can differ depending on your employee’s status throughout the tax year, as follows:

Full-year employees

These employees are on your payroll for the entire tax year, so their ECET calculation is straightforward. You calculate their tax based on the total annual salary above $40,000, as described above. 

However, it's important to also factor in any additional compensation, such as bonuses or overtime pay. These can increase the taxable wage amount. 

For example, if an employee's base salary is $50,000 but that employee receives a $5,000 bonus, the taxable amount for the ECET would be $15,000 (($50,000 + $5,000) – $40,000).

Partial-year employees

When an employee joins or leaves your company partway through the year, the ECET calculation is prorated based on the portion of the year they were employed. 

For example, say you hire an employee on $70,000 per year halfway through the year. In this case, the ECET calculation would only include the six months they worked in that tax year, which would be equivalent to $35,000 ($70,000 / 2). Even though their annual salary is higher than the threshold, they wouldn’t be eligible for the ECET during that half-year.

Conversely, an employee hired at the same time on an annual salary of $120,000 would be eligible. Even though they still only worked half the year, their half-year salary of $60,000 ($120,000 / 2) would create a taxable amount of $20,000 ($60,000 - $40,000). In this case, you would pay an ECET of $1,000 ($20,000 x 5%).

Seasonal or temporary employees

Like partial-year employees, seasonal and temporary employees require a prorated approach. 

Note that, if a seasonal employee earned $10,000 over three months, you wouldn’t multiply that figure to determine an annual pay. You’d simply take $10,000 as the taxable amount. Since it wouldn’t cross the threshold, you wouldn’t be liable for ECET for that employee.

ECET special scenarios

As employment models and working patterns evolve, there is a range of additional scenarios that may occur. Here’s what to do in such scenarios:

Remote employees based in New York

As mentioned, remote employees in New York can also be considered for ECET, even if your company is not based there.

As far as the ECET is concerned, remote employees are treated similarly to in-state employees. That means their earnings over the threshold are subject to the tax.

However, employers need to accurately track the work performed in New York to comply with ECET obligations.

See also: Where do remote workers pay taxes?

Employees with fluctuating incomes

For some employees — such as those who receive commissions or overtime pay — earnings can fluctuate. In such cases, calculating the ECET can be more complex. 

You must account for these variations monthly or quarterly, depending on your payroll schedule.

It’s important to maintain detailed records of these earnings, too. The total amount subject to the ECET may change significantly throughout the year. 

Employees who work in New York but live out of state

You must also account for ECET for employees who work in New York but live elsewhere (e.g., residents of New Jersey who work in New York City).

As far as ECEP is concerned, these employees are treated no differently than residents of New York. 

Keeping track of ECET records

As mentioned, it’s crucial to keep detailed records of your payroll activities when managing ECET, including:

• Gross wages

• Deductions

• Employees’ net pay

You also need to document the working location and hours of your remote and/or out-of-state employees.

With Remote’s Payroll software, this is quick and simple. We automate all calculations and ensure that the right amounts are being withheld and taxed, and your team members can easily manage and track their time. We also provide expert support and guidance on ECET and any other tax programs you and your people may be eligible for.

What are your ECEP obligations?

If you do decide to enroll into the ECEP, here are some actionable tips:

Reevaluate each year

ECEP participation is on an annual basis, so opting in for the current year doesn’t obligate you to do so in future years. This enables you to be flexible based on how your company’s finances and operations are evolving.

Each year, evaluate the cost-benefit ratio of participating in the ECEP and consider factors such as:

• Changes in payroll size

• Employee compensation

• Your business’s overall tax landscape

This can help you determine whether participating in the program still makes sense for your business.

Note that you must re-enroll each year to continue on the program. 

Communicate with your employees

Be open with your employees about the ECEP. If you decide not to participate, your employees should be aware.

When opting into the program, you should clearly explain your decision as it relates to the company's broader tax strategy. Explain that the ECEP provides:

• Better financial stability for the company

• The ability to invest more in staff

• Increased efficiency so that the company can continue to grow and innovate

Most importantly, your staff should be made aware that the program doesn’t directly impact their net wages.

Meet your financial commitments

The amount you will owe under the ECEP depends on the total wages paid to your employees. Remember: whatever exceeds the $40,000 threshold is the taxable amount.

As the employer, it’s your responsibility to pay these taxes. The payments are typically due quarterly and are submitted to the state of New York, with interest and penalties for late or non-payment.

Remote can help you meet all your tax obligations and ensure that you are fully compliant.

Should you opt into the ECEP?

Opting into the ECEP is a big decision, as it can impact your business’s tax strategy and financial planning. 

Of course, every situation is unique, so it’s advisable to consult with a relevant tax professional first.

In general, though, it may make sense for you to opt in if:

• Your business has high-wage employees who earn well above the ECEP threshold

• You’re looking for a safe way to ease your tax burden

It might not be suitable if:

• Your business primarily employs low-wage workers

• The costs required don’t justify the potential tax savings

• You have significant operational changes planned

Simplify your employee taxes with Remote

Remote Payroll handles all the intricacies of payroll tax compliance, ensuring that you are always paying the right amount at the right time. We make it quick and easy to run payroll, so that you can commit your time, resources, and money elsewhere.

We can also run payroll for all your employees, no matter where they are based — all in one system. This is ideal if you have people in multiple locations.

To learn more about Remote Payroll and to see how it works, speak to one of our friendly experts today.

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