What is Being Considered and How It’s Different from Recently Enacted Employee Tax to Fund Paid Family and Medical Leave.
When Governor Ned Lamont signed the new two-year budget for the 2020 and 2021 fiscal years (Public Act 19-117), there was a provision included that tasked the Department of Revenue Services with gathering data to evaluate the implementation of a payroll tax on employers commencing on January 1, 2021.
The primary purpose of the considered tax is intended to help employees achieve a work-around for the $10,000 federal itemized deduction state tax cap. New York instituted a similar employee payroll (work-around) tax, effective January 1, 2019. As of the date of this article, no such tax has been signed into law in Connecticut.
The Department was required to develop and produce an informational return form and send it to employers by August 15, 2019. The Department was required to send the form either electronically or by first class mail and employers are to return it by October 1, 2019. The Department opted to send its survey via email to businesses without a written letter to warn them. As a result, in our world of email phishing attacks, businesses who received the email questioned the legitimacy of the email.
Once the information is gathered, it will be submitted to a Payroll Commission, which shall consist of the Commissioner of Revenue Services, the Secretary of the Office of Policy and Management and the co-chairpersons and ranking members of the Finance Revenue and Bonding Committee. The Commission is required to report its recommendations, findings, and estimates to the Finance, Revenue and Bonding Committee by January 15, 2020. The Commission is required to: 1) hold informational forums to educate its members and the public about the payroll tax proposal; 2) request and receive comments, written testimony, and information from the public; and 3) consider such comments and testimony in its analysis.
On August 14 and August 15, the Department sent two e-mails to certain employers. The first email notified recipients that an information request from the Department was coming and the second email included a brief survey with four general questions about the business entity:
These email communications caught some employers off-guard and created some confusion. If you have received these emails from the Department, they are legitimate and require your attention. To read the press release issued by the Department about the issuance of the emails and their purpose, please access the Department’s website by clicking here.
Although it’s too early to know what the recommendation will be from the Payroll Commission, there is currently a proposal from the Connecticut School Finance Project, which is a non-profit entity founded in 2015 that is focused on identifying solutions to Connecticut’s school funding challenges.
The proposal submitted is based on a 5 percent (.05) payroll tax on employers. The imposition of the payroll tax would partially replace the state income tax. Generally, employees that would be in an income tax bracket higher than 5 percent would pay the rate differential, which may also include an increase to the higher ends of the tax bracket (e.g. taxpayers previously subject to the 6.99% bracket would pay 2.99% instead of 1.99%).
How the payroll tax would benefit employees, and potentially employers, is based on some complicated presumptions and mathematics that would have to be explained to employees (and to businesses located in and who wish to expand in Connecticut, in order to get their buy-in), which the Payroll Commission is charged to do.
The presumption under the proposal is that employers would either reduce their current payroll expense by 5 percent to compensate for the new payroll tax or alternatively delay/modify future wage increases. That adjustment would leave employers in the same economic position prior to applying FICA. Since the total employer payroll would be reduced by 5 percent, the employers’ FICA due to the federal government would also be reduced. In addition, the payroll tax would be deductible by businesses as an expense on their federal tax returns, reducing their profits for purposes of federal taxation.
With regard to the employees’ economics after a 5 percent salary reduction, aside from the state income tax reduction, there could be some FICA benefit so long as the employee is below the maximum wage base for FICA contributions. The other potential benefit to employees comes in the form of Connecticut employees reducing adjusted gross income, devoting less of their state and local tax deduction to personal income taxes and potentially having room under the deduction cap to deduct all or a larger portion of their local property taxes.
Considering that Connecticut enacted the passthrough entity tax , effective 2018, to work-around the state tax cap for owners of S corporations, partnerships, and limited liability companies, there seemingly is a strong push to provide employees earning wages with some relief as well. We will provide updates once details from the Payroll Commission start to come out.
In order to avoid any confusion, it’s important to note there is a separate payroll tax that was signed into law by the Governor on June 25, 2019 (Public Act 19-25) in order to fund a family and medical leave program. The program will entitle workers to 12 weeks of paid leave within a 12-month period to care for themselves, a covered family member, or equivalent of a family member. The plan will be paid for by a 0.5 percent (.005) payroll tax levied, not on the employer, but on certain employees (as well as certain self-employed individuals and sole proprietorships). However, this tax is not effective until January 1, 2021.
Disclaimer: Any written tax content, comments, or advice contained in this article is limited to the matters specifically set forth herein. Such content, comments, or advice may be based on tax statutes, regulations, and administrative and judicial interpretations thereof and we have no obligation to update any content, comments or advice for retroactive or prospective changes to such authorities. This communication is not intended to address the potential application of penalties and interest, for which the taxpayer is responsible, that may be imposed for non-compliance with tax law.