Federal 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. Here is a comparison of 2017, 2018, and 2019 rates.
|10%||$0-$9,325||10%||$0 - $9,525||10%||$0 - $9,700|
|15%||$9,326 - $37,950||12%||$9,526 - $38,700||12%||$9,701 - $39,475|
|25%||$37,951 - $91,900||22%||$38,701 - $82,500||22%||$39,476 - $84,200|
|28%||$91,901 - $191,650||24%||$82,501 - $157,500||24%||$84,201 - $160,725|
|33%||$191,651 - $416,700||32%||$157,501 - $200,000||32%||$160,726 - $204,100|
|35%||$416,701 - $418,400||35%||$200,001 - $500,000||35%||$204,101 - $510,300|
Married, Filing Jointly
|10%||$0 - $18,650||10%||$0 - $19,050||10%||$0 - $19,400|
|15%||$18,651 - $75,900||12%||$19,051 - $77,400||12%||$19,401 - $78,950|
|25%||$75,901 - $153,100||22%||$77,401 - $165,000||22%||$78,951 - $168,400|
|28%||$153,101 - $233,350||24%||$165,001 - $315,000||24%||$168,401 - $321,450|
|33%||$233,351 - $416,700||32%||$315,001 - $400,000||32%||$321,451 - $408,200|
|35%||$416,701 - $470,700||35%||$400,001 - $600,000||35%||$408,201 - $612,350|
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 TCJA lowers the optional flat tax rate on supplemental wages of up to $1 million in a taxable year to 22% (no other percentage is allowed).
- Mandatory flat rate: 37%. The TCJA lowers the mandatory withholding rate on supplemental wages exceeding $1 million in a taxable year to 37% for tax years 2018 through 2025.
Backup Withholding Rate
The TCJA lowers the backup withholding 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. For 2019, the standard deduction is $24,400 for married individuals filing jointly, $18,350 for head-of-household filers, and $12,200 for all others.
The 2019 amount for one withholding allowance on an annual basis is $4,200.
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)
- Publication 15 (Circular E), Employer's Tax Guide
- Publication 5330, The New Tax Cut Law Will Impact Your 2018 Tax Return
- IRS Tax Withholding Estimator
- "Paycheck Checkup" Flyer
- Tax Reform Webpage
- Withholding Scenarios
- 2020 Draft Form W-4 (8-8-19)
- 2020 Draft Publication 15-T, Federal Income Tax Withholding Methods (8-13-19)
- Payroll Currently, Issue 9, Vol. 27, "Payroll Currently, Issue 9, Vol. 27, "IRS Releases Second Drafts of Form W-4, Publication 15-T": The IRS released the second early drafts of the 2020 Form W-4 and the 2020 Publication 15-T.
- Payroll Currently, Issue 8, Vol. 27, "IRS Creates New Tool for Employees to Figure Tax Withholding": The IRS created an expanded, mobile-friendly online tool to make it easier for employees to have the right amount of tax withheld during the year.
- Payroll Currently, Issue 7, Vol. 27, "IRS Releases Draft Instructions for 2020 Income Tax Withholding, Form W-4": On June 7, the IRS released a draft of the new 2020 Publication 15-T, Federal Income Tax Withholding Methods.
- Payroll Currently, Issue 7, Vol. 27, "Draft 2020 Form W-4 Scenarios Using the Worksheet": APA created three scenarios to demonstrate how to calculate federal income tax withholding following the instructions in the draft of Publication 15-T.
- Inside Washington, July 2018, "APA Comments on Early Draft 2020 Form W-4, Instructions": The APA offered recommendations on the early release drafts of the 2020 Form W-4 and Publication 15-T to the IRS in June.
- Payroll Currently, Issue 6, Vol. 27, "IRS Releases Draft of 2020 Form W-4 for Comments": The IRS released an early draft of the redesigned 2020 Form W-4.
- Payroll Currently, Issue 4, Vol. 27, "IRS Lowers Penalty Threshold Again for Underwithheld Taxpayers": The IRS will waive the penalty for any taxpayer who paid at least 80% of their total tax liability, rather than the usual 90%.
- Payroll Currently, Issue 4, Vol. 27, "IRS to Offer Draft of 2020 Form W-4 by May 31": The IRS plans to issue an "early release" draft of the 2020 Form W-4, Employee's Withholding Allowance Certificate, for public comment by May 31.
- Payroll Currently, Issue 4, Vol. 27, "IRS Encourages Employers to Recommend a 'Paycheck Checkup'": The IRS is renewing its effort for employers to encourage employees to conduct a "paycheck checkup" early in 2019.
- Payroll Currently, Issue 4, Vol. 27, "IRS Clarifies Code P Reporting for Moves Made in 2017": The IRS informed employers that reported an amount on Form W-2 in Box 12, Code P, for non-military moves that they do not need to file corrected forms with the Social Security Administration or the IRS.
- Payroll Currently, Issue 1, Vol. 27, "IRS Releases 2019 Form W-4 With Few Changes": The 2019 Form W-4 is very similar to the 2018 Form W-4.
- 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.
- 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.