On December 22, 2017, President Trump signed H.R. 1, also known as the Tax Cuts and Jobs Act (TCJA), into law (Pub. L. 115-97). The TCJA, which marks the most sweeping tax changes in 30 years, will impact payroll professionals in 2018 and beyond. Most of the changes in the TCJA took effect January 1, 2018, and will remain in effect through 2025.
Tax Rates and Brackets
The TCJA retains seven tax brackets, but adjusts tax rates and taxable income levels. The tax rates are also used to determine supplemental and backup withholding rates, so those rates will also change. Here is a comparison of the 2017 and 2018 rates.
|2017 Tax Rate||Taxable Income||2018 Tax Rate||Taxable Income|
|10%||$0-$9,325||10%||$0 - $9,525|
|15%||$9,326 - $37,950||12%||$9,526 - $38,700|
|25%||$37,951 - $91,900||22%||$38,701 - $82,500|
|28%||$91,901 - $191,650||24%||$82,501 - $157,500|
|33%||$191,651 - $416,700||32%||$157,501 - $200,000|
|35%||$416,701 - $418,400||35%||$200,001 - $500,000|
Married, Filing Jointly
|2017 Tax Rate||Taxable Income||2018 Tax Rate||Taxable Income|
|10%||$0 - $18,650||10%||$0 - $19,050|
|15%||$18,651 - $75,900||12%||$19,051 - $77,400|
|25%||$75,901 - $153,100||22%||$77,401 - $165,000|
|28%||$153,101 - $233,350||24%||$165,001 - $315,000|
|33%||$233,351 - $416,700||32%||$315,001 - $400,000|
|35%||$416,701 - $470,700||35%||$400,001 - $600,000|
Rates for Withholding on Supplemental Wages for 2018
There is a two-tiered system for withholding income tax from supplemental wages at a flat rate:
- Optional flat rate: 22%. Because the optional flat tax rate on supplemental wages of up to $1 million in a taxable year is tied to a section of the Internal Revenue Code that is suspended for tax years 2018 through 2025 by the TCJA (§1(i)(2)), it appeared that the withholding rate would increase to 28% (from 25%). However, the IRS has confirmed the new rate is 22% (no other percentage allowed).
- Mandatory flat rate: 37%. The mandatory withholding rate on supplemental wages exceeding $1 million in a taxable year is tied to the highest income tax rate. For 2017, the rate was 39.6%. The TCJA lowers that rate to 37% for tax years 2018 through 2025.
Backup Withholding Rate
The backup withholding rate is tied to the fourth lowest tax rate. For 2017 the rate was 28%. The TCJA lowers that rate to 24% for tax years 2018 through 2025.
Personal Exemption Elimination and Income Tax Withholding
The TCJA eliminates the personal exemption claimed by taxpayers for themselves and their spouse and dependents for 2018-2025, and nearly doubles the standard deduction in 2018 to $24,000 for married individuals filing jointly, $18,000 for head-of-household filers, and $12,000 for all others. These amounts will be adjusted for inflation beginning in 2019. This will have a profound impact on income tax withholding. Generally, the amount of income tax withholding has been based on the number of withholding allowances an employee claims on Form W-4, Employee’s Withholding Allowance Certificate. These allowances, in large part, are based on the number of exemptions claimed by the employee. The Form W-4 also allows for withholding adjustments based on estimated itemized deductions (e.g., for state and local taxes or mortgage interest) that will be affected by this legislation.
Federal Tax Levies
The IRS has revised Publication 1494, Tables for Figuring Amount Exempt from Levy on Wages, Salary, and Other Income, and issued new Notice 1439, which updates the instructions for levy notices (Form 668-W).
IRS Tax Reform Implementation Office
The IRS has created the Tax Reform Implementation Office (TRIO) to develop a plan to implement the TCJA. The IRS must reprogram 140 systems and over 460 IRS forms, instructions, and publications will be created or revised.
Other Areas Important to Payroll
The TCJA also affects other areas important to payroll professionals, including: the suspension of the fringe benefit for moving expenses (except for certain military-related moves); a new employer tax credit for paid family and medical leave; and how states are reacting to the TCJA. States may revise their employee withholding allowance certificates or change which version of the Internal Revenue Code they follow.
- Tax Cuts and Jobs Act (TCJA; Pub. L. 115-97)
Internal Revenue Service
- Publication 15 (Circular E), Employer's Tax Guide
- IRS Withholding Calculator
- "Paycheck Checkup" Flyer
- Tax Reform Webpage
- IRS Offers Resources to Understand Tax Reform: The IRS released a tax tip reminding employers about online resources to help them understand the tax law changes made by the TCJA.
- IRS Issues Guidance on 2018 Payments for 2017 Moving Expenses: The IRS announced that employer payments or reimbursements in 2018 for employees' qualified moving expenses incurred in 2017 are excluded from the employees' wages for income and employment tax purposes.
- New Draft of 2019 Form W-4 Has Few Changes From 2018
- IRS Delays Form W-4 Revisions: The IRS announced it will delay major revisions to Form W-4, Employee's Withholding Allowance Certificate, until the 2020 version.
- 2019 Draft Form W-4 and Instructions
- IRS Releases Draft Form W-4 and Instructions: The draft form has been substantially revised to comply with the income withholding requirements that are part of the TCJA.
- APA Comments on the Preliminary 2019 Draft Form W-4 and Instructions: The APA's Government Relations Task Force (GRTF) Subcommittee on IRS Issues submitted comments on the substantially revised form and related instructions.
- Payroll Currently, Issue 8, Vol. 26, "IRS Gives Timeline of 2019 Form W-4, Requests Comments": The IRS expects to release a second draft in mid-August with a final version to be released in November 2018.
- Payroll Currently, Issue 6, Vol. 26: "IRS Encourages 'Paycheck Checkup' for More Employees": Employers should encourage more employees to use the new IRS Withholding Calculator.
- Inside Washington, April 2018, "APA Comments on IRS's 'Paycheck Checkup' Campaign": The APA's Government Relations Task Force (GRTF) Subcommittee on IRS Issues offered recommendations to the IRS on its "Paycheck Checkup" campaign, prior to its release in March.
- Payroll Currently, Issue 3, Vol. 26, "IRS Releases 2018 Form W-4": The form has not been changed, but the instructions and worksheets have been updated to reflect the changes in tax law made by the TCJA.
- Payroll Currently, Issue 3, Vol. 26, "Employers Complying With New Tax Law, According to APA Survey": APA's recent survey of its members showed that most employers did not have problems meeting the February 15 deadline to begin using the 2018 federal income tax withholding tables.
- IRS Releases 2018 Federal Income Tax Withholding Tables: On January 11, the IRS released Notice 1036, which contained the 2018 percentage method withholding tables.
- Inside Washington, February 2018, "APA in Action on Federal and State Tax Issues: IRS Requests Stakeholder Input on Tax Reform": The IRS has formed an internal work group to address changes involving the TCJA. APA is working with the IRS and states on state tax proposals.
- Payroll Currently, Issue 1, Vol. 26, "Sweeping Tax Legislation Will Affect Payroll": Here are changes made by the TCJA to tax rates and brackets, withholding on supplemental wages, and more.
- Inside Washington, January 2018, "APA Requests Tax Reform Transition Relief": With concerns about implementation of the TCJA, APA asked the U.S. Congress for transition relief for payroll. APA sent a similar letter to the IRS.