PAYTECH Magazine

PAYTECH is the industry's primary source for payroll information. The monthly magazine covers payroll management, technology, new and pending legislation, professional development, and trends shaping the payroll industry and profession. All APA members receive PAYTECH as a benefit of membership, and the magazine is published monthly, except for an August/September combined issue. PAYTECH is available to members in both print and digital formats.

Prepare to Weather the Coming Tax-Reform Storm

BY: Pete Isberg | 09/27/18

“I don’t think we’re in Kansas anymore …”

Actually, the tornado hasn’t touched down yet. It’s quiet now—the proverbial calm before the storm. But when it hits, you—like Dorothy in the Wizard of Oz—may no longer recognize your surroundings. The worrisome weather is, of course, brought about by the so-called Tax Cuts and Jobs Act (TCJA; Pub. L. 115-97), which may affect employees in surprising ways as they file their 2018 income tax returns and adjust their withholding for 2018 and 2019.

Fortunately, a little education and preparation will lead astute APA members to sunnier surroundings without a lot of turbulence. Think about it: The TCJA included many sweeping changes to the tax law, and yet—thanks to congressional language permitting the IRS to defer withholding changes to 2019—there seems to have been little impact. Don’t be misled. It’s coming.

As a reminder, the TCJA made several relevant changes, such as:

  • Lower individual and business tax rates
  • Increased standard deduction
  • Eliminated personal and dependent exemptions
  • Expanded child tax credit ($2,000 per qualifying child; $1,400 refundable)
  • $500 nonrefundable credit for other dependents
  • $10,000 limit on state/local tax deductions
  • Suspension of certain transportation and moving expense tax preferences
How Will Payroll Withholding Change?

We actually still don’t know the answer at this point. A dramatically different draft Form W-4 was released in June, and the IRS and Treasury are still studying more than 100 comment letters. The APA and a handful of other organizations also met with senior IRS officials to discuss alternatives.

The draft 2019 Form W-4 and instructions may be the most significant change to income tax withholding since withholding began. Who can remember any basis other than withholding allowances? Right, no one. It has always been withholding allowances. This should be a hint as to the magnitude of the change to withholding.

Personal and dependent exemptions served as the basis for most Forms W-4 over the years. Newly hired employees were quickly able to count family members to fill out their initial W-4 without pausing to think. Now, however, we may be looking at a W-4 that looks and feels a lot more like completing the actual annual income tax return. Folks may need to stop and look up last year’s return, estimate annual deductions, and figure out their tax credit eligibility.

Specifically, employees will be asked to estimate annual income from other jobs in the household, other income, and full-year deductions and tax credits. This would improve accuracy of withholding by applying the tax rates and brackets that apply to the entire family when there are two or more wage-earners. The new form would also shift basic math operations to employers; for example, converting annual income, deductions, and tax credit amounts to per-pay-period amounts. Estimated full-year tax credit amounts would replace the difficult conversion of tax credits into adjustments to income. Those who would rather bypass the new lines and simply add an additional amount to withhold from each paycheck can do so.

As PAYTECH goes to press, it’s not yet clear whether employers will need to insist that employees use the new Form W-4. For example, some employees may ask if they can just make a quick change to their current withholding allowances. Should the employer honor such a request? Generally, the IRS advises that “whenever employers hire new employees or existing employees change their withholding during 2019, they should use the new method” (2019 Draft Form W-4 Instructions, page 9). The APA has asked the IRS to clarify whether employers must insist on the new form after 2018.

Impact to State, Local Withholding

Many states’ tax laws are statutorily linked to the federal tax law and, not surprisingly, many states accept or require the federal Form W-4 for state withholding purposes. How will the states respond if the federal W-4 no longer has withholding allowances but the state tax law still permits personal and dependent exemptions? Several states may quickly revise their own withholding systems and tax tables for January 2019, but since the IRS draft Form W-4 wasn’t available as of mid-August, states may be issuing withholding announcements in late 2018 or even 2019 that could be immediately effective.

In addition, some states have proposed changes to address the TCJA’s $10,000 limit on deductibility of state and local taxes. New York enacted an optional employer payroll tax, which would result in employee income tax credits roughly equal to the employer tax payments. For those employers that opt in, the tax would be 1.5% of each New York employee’s wages over $40,000 for 2019 (3% in 2020 and 5% thereafter). Employers will have an opportunity to opt in annually. However, the New York tax authority has published minimal guidance on the subject, and IRS guidance is expected that could affect the outcome. Other states are following this concept with interest. If it works out, employers could be facing a variety of new employer payroll taxes in different states, with special withholding calculations.

Pay Attention to the IRS ‘Paycheck Checkup’ Initiative

Things have changed—probably more than anyone can know at a glance. Payroll administrators in particular can help employees this year by suggesting a mid-year “paycheck checkup.

Every APA member wants to avoid that angry confrontation in April 2019 from an employee who asks why they were not advised in 2018 of just how much their taxes would change. There is no better way than the IRS Withholding Calculator to find out if someone is heading for an unhappy surprise when they file their 2018 personal income tax return. Checking now can prevent an unexpected tax due return and help employees make up for any under-withholding by adjusting withholding now for the balance of 2018.

The IRS recently noted, for example, the new Credit for Other Dependents for dependents who don’t qualify for the expanded Child Tax Credit, such as dependent children age 17 or older at the end of 2018. However, many may be unaware that these credits phase out beginning at $400,000 for joint filers and $200,000 for others. There are many other provisions that have changed as a result of the TCJA, which won’t be apparent unless people take the time to explore the IRS Withholding Calculator.

The IRS notes especially that certain taxpayers should check their withholding now. For example:
  • Two-income families
  • Those with two or more jobs at the same time, or who only work part of the year
  • Those with Child Tax Credits, or who have dependents age 17 or older
  • Those who itemize deductions or have complex tax returns

The Withholding Calculator will ask for information from last year’s tax return and a recent pay statement and recommend changes to make withholding accurate for 2018, such as an additional amount to withhold for the rest of 2018. Needless to say, employees who change their withholding for 2018 should recheck in early 2019. Any mid-year withholding change in 2018 would have a different full-year impact in 2019.

What to Do Now

For now, APA members should watch for the 2019 Form W-4 and related IRS guidance. They should also give some thought as to what to say to existing employees and new hires if the IRS permits continued reliance on the old form in addition to the new. Stay tuned for a possible “Tax Reform 2.0,” as well. Several legislative proposals enjoy strong support and may be enacted in the closing months of 2018.

Watch for late-breaking state tax changes, which may include new state-specific W-4 equivalents or significant changes to state withholding calculations. And lastly, be like Dorothy as you follow the road to payroll compliance, and look for friends along the way with brains, heart, and courage. None of this will get any easier.

Pete Isberg manages legislative and regulatory affairs for ADP, LLC and serves as President of the National Payroll Reporting Consortium, a non-profit trade association whose member companies provide payroll processing, employment tax filing, and related services. Isberg was APA’s Payroll Man of the Year in 2013 and is active on four of the APA’s Government Relations Task Forces (GRTF). He is a member of the Board of Contributing Writers for PAYTECH.

Pete Isberg manages legislative and regulatory affairs for ADP, LLC and serves as President of the National Payroll Reporting Consortium, a non-profit trade association whose member companies provide payroll processing, employment tax filing, and related services. Isberg was APA’s Payroll Man of the Year in 2013 and is active on fouof the APA’s Government Relations Task Forces (GRTF). He is a member of the Board of Contributing Writers for PAYTECH.

Meet Jessica Kirsch, CPP, Payroll Coordinator at the Columbus Zoo and Aquarium

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