News outlets have emphasized the substantial and far-reaching reforms of the Tax Cuts and Jobs Act signed into law on Dec 22, 2017. It’s been called “sweeping,” significant,” and widely “consequential.” The act has the broadest scope of any such law in decades. What do you need to know to answer employees’ questions on pay day?
Withholding Tax Rates Have Changed
Most Americans will see an increase in their take home pay thanks to new tax withholding tables. According to a statement by the US Department of Treasury, 90% of Americans will receive larger paychecks. The act reduces withholding tax rates by about 2-3% for most tax brackets. While the number of brackets remains the same, seven, the wage thresholds have also changed. The new tables need to be implemented by February 15th. If you use a payroll provider, they’ll likely handle all required adjustments for you. Chances are that they already have.
|Rate||Income bracket||Rate||Income bracket|
|39.6%||$426,700 and up||37%||$500,000 and up|
|Married, Filing Jointly|
|Rate||Income bracket||Rate||Income bracket|
|39.6%||$480,050 and up||37%||$600,000 and up|
While many employees will be happy to have more money in the bank, others may question if they’re still deducting enough for taxes. Most don’t need to worry. According to the IRS, the majority of individuals over-withhold on their taxes. Instead of paying too little, they actually pay too much. That’s why many people have come to expect a tax refund each year.
You can let your employees know that there’s nothing they’re required to do. For individuals with a simple and straightforward tax situation, the correct amount of taxes will already be withheld. The new tables were designed for use with the current W-4 forms they’ve already filed. However, it’s always a good idea to periodically review the number of allowances claimed on form W-4. Major life changes such as marriage, parenthood, or taking a second job can all affect an employee’s filing status and allowances.
For the particularly diligent, the IRS plans to release a revised form W-4 and an updated version of their withholding calculator by the end of this month. This will be especially important for anyone planning to itemize deductions on their tax return.
It’s important to note that while the terms are often interchanged, “exemption” and “allowance” are not the same thing. The exemptions claimed on a personal tax return are not the allowances specified on form W-4. The new tax law has suspended personal exemptions, but allowances remain. These allowances help determine the amount of tax withheld from each paycheck. The higher the number, the less tax will be taken out.
Health Insurance and the Individual Mandate
Employees may ask if they’re still required to have health insurance. Under the Affordable Care Act (ACA), the individual mandate penalized individuals without health insurance coverage. The new tax law reduces the amount of this penalty to zero, effective in 2019. While it doesn’t fully repeal the mandate, it nullifies it. However, employers should be aware that the employer mandate under the ACA has not been repealed and remains in effect. ACA coverage and reporting laws still apply.
HSAs and Retirement Plan Contribution Limits
While it was still under proposal, many speculated that the tax reform would enact changes to Health Savings Accounts (HSAs). It was also rumored that it’d drastically reduce the contribution limits for retirement plans. No such changes are included in the actual act.
Supplemental Wages & Transportation Benefits
The following situations are more unique, but you’ll want to be aware of the changes if questions arise:
Supplemental wages (bonuses, commission, etc. paid separately from regular wages) were previously taxed at a flat rate of 25%. Now they will be taxed at a rate of 22%. If these supplemental wages surpass $1 million, the rate bumps up to 37% on the amount over that threshold.
Reimbursements paid to an employee for qualified moving expenses—expenses incurred due to a job change resulting in a move greater than 50 miles—are now taxable. They’d previously been excluded from both the employee’s income taxes and the employer’s employment taxes.
Under prior tax law, employers could pay commuting employees up to $255/month to subsidize parking costs or transit passes. Employees received these passes on a pre-tax basis. In turn, employers could deduct these expenses from their business taxes. The new tax law leaves the employee portion intact, but employers may no longer deduct the expenses.
There was a similar benefit for employees who bike to work. Employers could pay employees on a pre-tax basis up to $20/month for bicycle commuting expenses. Unlike transit pass reimbursements, employers can continue to pay and deduct these expenses from their business taxes under the new law. Employees, however, will now be taxed for this benefit.
We intend this article as an informational guide to the most common payroll items changed by the new tax law. It offers only a glimpse and focuses on employee concerns. For additional information, we suggest the following resources: