Compliance

Title

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 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.

Single

2017 Tax RateTaxable Income2018 Tax RateTaxable Income
10%$0-$9,32510%$0 - $9,525
15%$9,326 - $37,95012%$9,526 - $38,700
25%$37,951 - $91,90022%$38,701 - $82,500
28%$91,901 - $191,65024%$82,501 - $157,500
33%$191,651 - $416,70032%$157,501 - $200,000
35%$416,701 - $418,40035%$200,001 - $500,000
39.6%$418,401+37%$500,000+

Married, Filing Jointly

2017 Tax RateTaxable Income2018 Tax RateTaxable Income
10%$0 - $18,65010%$0 - $19,050
15%$18,651 - $75,90012%$19,051 - $77,400
25%$75,901 - $153,10022%$77,401 - $165,000
28%$153,101 - $233,35024%$165,001 - $315,000
33%$233,351 - $416,70032%$315,001 - $400,000
35%$416,701 - $470,70035%$400,001 - $600,000
39.6%$470,701+37%$600,001+

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.

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