Federal Tax Reform

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 TJCA, which marks the most sweeping tax changes in 30 years, will impact payroll professionals in 2018 and beyond. Most of the changes in the TJCA 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.

Single

Married, Filing Jointly

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.

Other Areas Important to Payroll
The TCJA also affected many other areas important to payroll professionals, including the amount of wages exempt from a federal tax levy, inflation adjustments to items in the Internal Revenue Code, and fringe benefit changes affecting employees and employers.

Links:

• Tax Cuts and Jobs Act
• Payroll Currently, Issue 1, Vol. 26, January 5, 2018, “Sweeping Tax Legislation Will Affect Payroll”: This article describes the changes made by the Tax Cuts and Jobs Act to tax rates and brackets, withholding on supplemental wages, the backup withholding rate, personal exemption elimination and income tax withholding, federal tax levies, inflation adjustments, fringe benefit changes affecting employees and employers, listed property, such as computers, stock options, paid family and medical leave tax credit, disaster distributions from retirement plans, elimination of the Affordable Care Act individual mandate, and proposed measures that were not included in the final legislation.
• Inside Washington, January 2018, “APA Requests Tax Reform Transition Relief”: With concerns about implementation of the Tax Cuts and Jobs Act, APA asked the U.S. House of Representatives and Senate for transition relief for payroll. APA said this tax reform measure will not make minimal changes to the tax system. It will turn much of the system, especially the payroll withholding infrastructure that is the underpinning of our entire economy, upside down. APA sent a similar letter to the IRS.
• IRS Releases Withholding Tables
• IRS to Revise Form W-4, Withholding Tax Calculator
• Pay News Now blog article dated 12/22/17, “Tax Reform, Paychecks, and Payroll” by Curtis Tatum, Esq.
• Pay News Now blog article dated 12/22/17, “Tax Reform Legislation Will Affect Payroll” by Curtis Tatum, Esq.

Education Links:

• Tax Reform: The Latest IRS Requirements for Compliance, March 27 & 29, 2018
• Free to APA members (webinar on demand): Tax Reform: How Will It Impact Your Payroll Process?
• Webinar on Demand (webinar on demand 2/15/18): “New Year, New Challenges: It’s 2018"
• Payroll Tax Forum