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Now that The Tax Cuts and Jobs Act (TCJA) is officially the law of the land, your employees are probably wondering how their paychecks will change. And they may be looking to you, their trusty employer, for answers.
Your dilemma: You want to give your team the right information without overwhelming them with the tax law’s mind-numbing complexities. Thankfully, we wrote this post with that delicate balance in mind.
A quick overview of the tax reform.
President Trump signed the TCJA into law on December 22nd, 2017. Shortly after the TCJA took effect, we covered some of the changes small businesses should be aware of. Now, we’ll explore how the law will affect another key group: your employees.
The TCJA lowered the individual rates for nearly every tax bracket. These rate cuts mean that the vast majority of employees will have less federal taxes withheld, which will increase their take-home pay. Sweet deal, right?
The new tax reform became official on January 1st, 2018 and the first significant development that came out was the release of the new withholding tables. Now, let’s sit down and unfold them.
A quick overview of the new withholding tables.
The Internal Revenue Service (IRS) released the new withholding tables on January 11th, 2018. In that announcement, the IRS recommended that employers should use the new tables ASAP and no later than February 15th, 2018.
Not to mention, the sooner you start using the new tables, the sooner your employees will see changes in their paychecks. Some payroll services have already updated their systems since the IRS published the tax tables in mid-January, enabling customers to benefit from the (mostly) lower tax amounts right now.
One concern experts initially had was that employees would have to fill out new W-4 forms. But in the IRS’s announcement, we got some good news:
“The new withholding tables are designed to work with the Forms W-4 that workers have already filed with their employers to claim withholding allowances. This will minimize the burden on taxpayers and employers. Employees do not have to do anything at this time.”
However, on January 29th, the plot thickened. The IRS released more guidance that stated they’re working on “revising Form W-4” and that new version “may not be released until after February 15, 2018.”
Okay, lots of words. But what does this mean for your team? As of this article’s publication date, your employees don’t need to do anything. However, they may want to reconsider their withholding amount sometime in late February 2018.
In general, it’s always a good idea to have your employees review their withholding regularly, especially if they got married, had kids, or took on a second job.
Form W-4 is updated annually, so be sure to visit the IRS website for the appropriate year to use the most recent version.
The new withholding tables, in action.
So, how will the withholding tables impact a few various employee scenarios? We pulled some examples:
- A single taxpayer who is paid $500 weekly (Table 1) $47.82 will be withheld from their paycheck. $18.30 + $29.52 (($500 – $254)*12%)
- A head-of-household taxpayer who is paid $1,000 biweekly (Table 2) $95.62 will be withheld from their paycheck. $36.70 + $58.92 (($1,000 – $509)*12%)
- A married taxpayer who is paid $4,000 semimonthly (Table 3) $435.80 will be withheld from their paycheck. $371.12 + $64.68 (($4,000 – $3,706)*22%)
In these hypothetical examples, you’d compare the new withholding amount to your employee’s current withholding to determine the change in their paycheck. Keep those withholding tables handy, just in case any of your employees have more questions about their specific situation.
How do I comply with these changes as an employer?
As we mentioned, the IRS announcement instructs folks to “begin using the 2018 withholding tables as soon as possible, but not later than February 15th, 2018,” and to continue using the 2017 withholding tables until that point.
The IRS announcement also says that the new tables are “the first in a series of steps that the IRS will take to help improve the accuracy of withholding following major changes made by the new tax law.”
Keep tabs on updates by checking the IRS news release page regularly or by subscribing to the IRS GuideWire to receive emails about the developments. And finally, work with your payroll provider to help you stay on schedule.
What questions will my team ask—and how should I respond?
We’re not mind-readers, but here are a few questions we bet you’ll get from your employees:
Q: Do I need to fill out a new W-4?
A: Not yet. The IRS says that the new Form W-4 should be out in February, so stay tuned. It’s a good idea for everyone to review their withholding amount occasionally, especially if you recently got married, had kids, or took on a second job.
Since the new withholding tables reduced tax withholding for most individuals, if you claim a large number of allowances on your current W-4, you may want to check with a tax professional to see if you need to adjust your allowance, so you don’t end up owing money at the end of the year.
A new Form W-4 is issued every year, so be sure you’re telling your employees to use the correct form if they’re thinking about updating theirs.
Q: Does the tax law affect my 2017 tax return that I’m filing this year (in 2018)?
A: Nope! All of the changes affecting individuals became official on January 1st, 2018, meaning that it will impact 2018 tax returns that will be filed in 2019.
Q: When will the new tax law affect my paycheck?
A: Between mid-January and mid-February 2018 and going forward, but it wholly depends on when we (i.e., you, the employer or your payroll provider) get the new withholding implemented.
Q: How will the new tax law affect my paycheck?
A: A few high earners may see an increase in taxes withheld, but most people can expect less federal taxes withheld, meaning higher net pay.
Keep your eyes peeled.
There will be many more updates from the IRS in the weeks to come, so be sure to stay on top of the developments. Compensation is important, so keeping your team informed on how the tax law will affect their pay will go a long way toward building trust and loyalty.
Want to learn even more about the tax reform? Check out this live recording, where two experts break it down for small businesses.
This article contains general information but is not intended to be construed as tax advice. Each business and situation is different, so please consult with a tax professional to help you make the right choices for your company.