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PrintFederal tax reform continues to be a hot topic as many changes made by the Tax Cuts and Jobs Act (TCJA; Pub. L. 115-97) continue to impact payroll professionals. Although most of the changes in the TCJA took effect January 1, 2018, they 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 also change. Prior to the TCJA, the tax rates in 2017 were 10%, 15%, 25%, 28%, 33%, 35%, and 39.6%. Beginning in 2018, the tax rates changed to 10%, 12%, 22%, 24%, 32%, 35%, and 37%. Here are the 2021 rates.
2021 Rates and Taxable Income
| 2021 Tax Rate | Single | Married, Filing Jointly | Head of Household |
| 10% | $0-$9,950 | $0 - $19,900 | $0 - $14,200 |
| 12% | $9,951 - $40,525 | $19,901 - $81,050 | $14,201 - $54,200 |
| 22% | $40,526 - $86,375 | $81,051 - $172,750 | $54,201 - $86,350 |
| 24% | $86,376 - $164,925 | $172,751 - $329,850 | $86,351 - $164,900 |
| 32% | $164,926 - $209,425 | $329,851 - $418,850 | $164,901 - $209,400 |
| 35% | $209,426 - $523,600 | $418,851 - $628,300 | $209,401 - $523,600 |
| 37% | $523,601+ | $628,301+ | $523,601+ |
Rates for Withholding on Supplemental Wages
There is a two-tiered system for withholding income tax from supplemental wages at a flat rate:
- Optional flat rate: 22%. 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)). The rate is 22% (no other percentage allowed).
- Mandatory flat rate: 37%. The TCJA lowers that rate to 37% for tax years 2018 through 2025.
Backup Withholding Rate
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 through 2025. For 2021, the standard deduction is $25,100 for married individuals filing jointly, $18,800 for head-of-household filers, and $12,550 for all others.
Federal Tax Levies
The IRS issued the 2021 Publication 1494, Tables for Figuring Amount Exempt from Levy on Wages, Salary, and Other Income, on November 5, 2020. The TCJA altered the way the amount of wages, salary, or other income exempt from a federal tax levy is calculated. For taxable years beginning in 2020, the dollar amount used to calculate the amount determined under IRC §6334(d)(4)(B) is $4,300.
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 are revising their employee withholding allowance certificates and changing which version of the Internal Revenue Code they follow.
Links:
- Payroll Currently, Issue 3, Vol. 29, "IRS Releases 2021 Publications 15 (Circular E), 15-A, and 15-B": The IRS released the 2021 Circular E, Employer's Tax Guide (Publication 15), the Employer's Supplemental Tax Guide (Publication 15-A), and the Employer's Tax Guide to Fringe Benefits (Publication 15-B).
- Payroll Currently, Issue 1, Vol. 29, "IRS Releases 2021 Publication 15-T": The IRS released the 2021 Publication 15-T, which describes how to figure federal income tax withholding using the percentage method and the wage bracket method and describes alternative methods for figuring withholding.
- Payroll Currently, Issue 1, Vol. 29, "IRS Releases 2021 Form W-4 With Few Changes": The IRS issued Form W-4 for 2021.
- Payroll Currently, Issue 12, Vol. 28, "Tables Issued for Figuring Amount Exempt From Levy in 2021": The IRS issued Publication 1494 for 2021.
- Payroll Currently, Issue 11, Vol. 28, "IRS Issues Final Rules for Federal Income Tax Withholding": The IRS issued final regulations to update the federal income tax withholding rules and reflect changes made by the TCJA.
- Payroll Currently, Issue 11, Vol. 28, "IRS Issues Final Rules for Meals and Entertainment Expenses": The IRS issued final regulations to reflect changes made by the TCJA.
- Payroll Currently, Issue 10, Vol. 28, "IRS Issues Final Rule for Withholding on Retirement, Annuity Payments": The IRS issued a final regulation to update withholding on retirement and annuity payments, which reflect changes made by the TCJA.
- Payroll Currently, Issue 8, Vol. 28, "IRS Release Draft Form W-4P to Reflect Tax Law Changes": The IRS issued a draft Form W-4P to update withholding on retirement and annuity payments.
- Payroll Currently, Issue 7, Vol. 28, "IRS Issues Proposed Rules on Qualified Transportation Fringe Expenses": The IRS issued proposed regulations to update changes made by the TCJA.
- Payroll Currently, Issue 6, Vol. 28, "IRS Issues Proposed Rule for Withholding on Retirement, Annuity Payments": The IRS issued a proposed regulation to update withholding on retirement and annuity payments, which reflect changes made by the TCJA.
- Payroll Currently, Issue 3, Vol. 28, "IRS Issues Proposed Rules for Federal Income Tax Withholding": The IRS issued proposed regulations to update the federal income tax withholding rules and reflect changes made by the TCJA.
- Payroll Currently, Issue 2, Vol. 28, "IRS Updates Tax Withholding Estimator for 2020": The IRS released a new version of its tax withholding estimator, which incorporates changes from the redesigned Form W-4.
- Payroll Currently, Issue 2, Vol. 28, "IRS Updates Notice 1392 for Nonresident Aliens": The IRS updated Notice 1392, Supplemental Form W-4 Instructions for Nonresident Aliens, to align with changes made to the 2020 Form W-4.
- Payroll Currently, Issue 1, Vol. 28, "IRS Releases Publication 15-T": The IRS released the final version of the 2020 Publication 15-T, which is a brand new publication that explains how to withhold federal income tax on wages paid beginning January 1, 2020.
- Payroll Currently, Issue 1, Vol. 28, "IRS Releases 2020 Publications 15 (Circular E), 15-A, and 15-B": The IRS released the 2020 Circular E, Employer's Tax Guide, the Employer's Supplemental Tax Guide, and the Employer's Tax Guide to Fringe Benefits.
- Payroll Currently, Issue 1, Vol. 28, "Withholding Scenarios Using Publication 15-T": APA created three scenarios to illustrate the federal income tax withholding calculations using Worksheet 1 of Publication 15-T.
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