Tax Law Blog | IRS Tax Attorneys

The owner of a small transportation company on Long Island is arguing that it is not only unfair he has to pay a payroll tax that benefits a competitor of his — the Metropolitan Transportation Authority — but that its adoption was unconstitutional.

William Schoolman, president of Hampton Luxury Liner and Classic Coach, a luxury coach bus service that operates between Manhattan and various locations in Suffolk County, filed a lawsuit Dec. 14 in state Supreme Court in Suffolk County after having to pay $2,500 in payroll taxes in 2009 for the MTA fund.

Gov. David A. Paterson in May signed into law legislation that requires employers in the MTA’s service area to pay the payroll taxes. Lawmakers said the tax was needed to help bring MTA out of a $1.8 billion deficit.

“New York state is very unfriendly to businesses. It really is outrageous what the Legislature did,” said Schoolman. “They passed an illegal law.”

The Metropolitan Commuter Transportation Mobility Tax affects employers, including schools, hospitals and people who are self-employed, in the New York City boroughs and Rockland, Putnam, Nassau, Suffolk, Orange, Dutchess and Westchester counties. The tax amounts to 0.34 percent of every 1 percent of their payroll.

The 12 counties make up the Metropolitan Commuter Transportation District.

Schoolman’s lawsuit lists six causes of action, and five of them are claims of constitutional violations.

The suit alleges the Legislature failed to the pass the payroll tax law by the two-thirds vote required for legislation affecting property and the appropriation of money for local government: It passed in the Senate with 60 percent of the vote and in the Assembly with 52 percent.

The suit also claims the bill passed with more than one appropriation, which is unconstitutional under Article VII, Section 6 of the Constitution, which states: “… no appropriations shall be made except by separate bills each for a single object or purpose.”

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Payroll taxes are the state and federal taxes that you, as an employer, are required to withhold and/or to pay on behalf of your employees. You are required to withhold state and federal income taxes as well as social security and Medicare taxes from your employees’ wages. You are also required to pay a matching amount of social security and Medicare taxes for your employees and to pay State and Federal unemployment tax.

Most of the states have income tax structures that are based on the federal system, so you will use the W-4 to calculate the amount of state income tax to withhold.

Social security and Medicare taxes, also known as FICA taxes must be withheld from your employees’ wages. As an employer, you must also pay a matching amount of FICA taxes for your employees.