One of the most important pieces of tax legislation in recent years was signed into law by the president in December of 2017. Originally introduced as the Tax Cuts and Jobs Act, the final version of the bill is known simply as the 2017 Tax Act. The new tax law contains several provisions that affect how companies process employee payroll.
The 2017 Tax Act makes changes to both business and personal tax regulations. The new tax law has been described as a tax cut, in part due to the increase in the standard deduction for individuals. Many of the tax rule changes take effect on the first day of 2018. However, the IRS forms and publications necessary to implement the changes cannot be produced that quickly.
If you own or manage a company that has employees, continue withholding from regular wages at current rates until new forms are produced by the IRS. Some types of payments made to workers, however, will not require new forms or additional withholding instructions.
IRS Form W-4
Every employee provides a completed Form W-4 to their employer so that a reasonably accurate amount of tax is withheld for each pay period. Form W-4 must be redesigned by the IRS to account for the increase in the standard deduction. Until employees have access to the updated version, employers will have to withhold taxes based on the existing Form W-4.
The new law also modifies the tax rates for the individual tax brackets. Employers rely on a matrix of withholding tables to determine how much tax to withhold from each employee. Withholding is based partially on information contained in each employee's Form W-4. Until new withholding tables are published by the IRS, you will have to rely on the current withholding tables.
Backup withholding tax rate
Your company might utilize the services of an independent contractor who is not classified as an employee. If so, backup withholding is required if the independent contractor fails to provide you with their taxpayer identification number. The backup withholding tax rate for 2018 is lowered to 24 percent.
Supplemental wages flat rate
Many types of income that are not considered regular wages are categorized as supplemental wages. Common types of supplemental wages include commissions, bonuses, and overtime pay. Although not yet confirmed by the IRS, the flat withholding rate on supplemental wages of up to $1 million appears to be increasing to 28 percent in 2018.
Tax withholding tables can be incorporated into payroll software as soon as the new information is released by the IRS. On the other hand, many employees may need to complete a new paper Form W-4. Contact an accountant for further information about how the new tax bill will affect payroll taxes.Share