Tax Reform Workaround
New York State is allowing employers to opt into an additional payroll tax. This tax is designed to help those who have been negatively affected by the federal tax reform. This payroll tax is fully deductible and should allow the state to maintain its revenue while allowing the same or greater take home pay for the employee and the employer. The new tax reform caps state and local property tax deductions at $10,000 and the optional payroll tax is an attempt to work around that.
There are three main things that employers need to know about this:
• Participation is voluntary
• The employer would pay a payroll tax starting at 1.9% in 2019 and increases to 5% in 2021
• The employee will eligible for a personal income tax credit based on the taxes their employer paid
This legislation is designed to take revenue away from the federal government and shift the tax dollars to the state. It is important to note that even though there is a potential benefit for businesses and employers to participate in this voluntary tax, it may not be worth the administrative costs. It could be a challenge to implement this for unionized workforces and companies that do 401K matches.
This model, if widely adopted, could thwart many of the efforts of the recent federal tax reform legislation. Tax reform 2.0 is being discussed and it will be interesting to see if the new reform limits the deductibility of the payroll tax.
Businesses that want to take advantage of this potential opportunity can opt in until December 1st of 2019.