By sprinting to pass the most comprehensive tax bill since 1986 right before the holidays (effective on earnings beginning January 1, 2018), Congress has left American small business employees and owners in a precarious situation.
The tax bracket rate changes are somewhat straightforward. But deductions and credits are way more complex and vary by circumstance. This presents a painful predicament for both employers and employees.
Say you have a major life event this year — have a child, get divorced, or want to invest more in your small business. How will you know what your tax liabilities will be? The implications for each American employee or small business, particularly the nearly 40 million taxpayers who claim pass-through income (business income that is taxed once at the individual rates of the business owner, instead of through the corporate tax structure) are unclear. Maybe, as promised, employees and employers will pay less in taxes. More likely, however, many will pay more. The truth? It is hard to know because the proposed changes happened so quickly — and garnered great headlines. But the fast implementation leaves those most affected with their business’s greatest enemy: uncertainty. There has not been enough time for the IRS to develop new withholding tax guidance.
In 1986, when significant tax changes were made, Congress appropriated additional funds to the Internal Revenue Service (IRS) to support the extra work required to implement those changes. This did not happen with the most recent changes. In fact, the IRS budget has been slashed by $900 million or 17 percent, after adjusting for inflation — and its staff reduced by 21,000, or 23 percent. In the meantime, it has had to process roughly 10 million more individual returns on deteriorating, legacy technology systems that will not be easy to update.
Without formal guidance from the IRS, the onus is now on the individual to interpret their 2018 tax liability. Additionally, the IRS currently has no intentions to revise the Federal W-4 in 2018, which has historically informed the employer how much to withhold based on the employee’s personal allowances. With the elimination of the personal exemption, we are left to anxiously await further word from the IRS, which it plans to release later this month. Fortunately, the IRS noted that 2018 withholding tax guidance will be developed to work with existing W-4s that employees have already completed.
To know if take-home pay can be spent or should be saved for year-end taxes, individuals, families, and small business owners would need to complete their quarterly or annual 2018 tax estimates in advance. It takes time, expertise, or professional help to do these advance estimates accurately. Unfortunately, those are luxuries most American workers and small business owners don’t have.
Because most people will not complete their tax estimates in advance, the bigger paychecks that most employees will receive in February may be fool’s gold, tempting employees to spend that extra money coming in without knowing what their year-end tax refund is, or what they’ll owe. By the government’s own reckoning, nearly half of Americans are not financially prepared to absorb an unexpected $400 expense. If the objective of the tax bill was to give businesses and employees more money in their pockets so that they can put it back into the economy, the actual outcome — people spending money that they may owe later — could be devastating.
What can be done?
While we strongly believe the timing of this bill and the rush to implementation were unfair to both employees and employers, these changes are happening and will have immediate consequences. Here are a few steps to help all of us stay abreast of these changes:
- Use technology to ease some of the pain. There are many platforms that help small business owners by automatically staying on top of the new payroll tax withholdings. As a modern payroll company, for example, Gusto will be updating tens of thousands of our customers’ payrolls with the new tax tables as soon as the IRS provides us with that guidance. Having peace of mind that you won’t get fined for the incorrect withholdings is one less thing to worry about.
- Stay informed. We’ve put together a resource for small business owners on how the TCJA could affect each type of business, from C corps to pass-through entities. Another great resource for more in depth insights is Bloomberg BNA.
- Contact a professional. Given how quickly this was passed, most employees are likely unaware of how these changes could impact their 2018 tax-withholdings. One easy solution: employers can connect employees to tax professionals to help. Experienced Gusto accountants and bookkeepers are listed here.
- Put a Google alert on IRS.gov. Many of us will be anxiously awaiting further guidance from the IRS, and for good reason. So check https://www.irs.gov/newsroom for the latest.
Since helping small businesses administer payroll and provide benefits to their employees is our lifeblood, we intend to keep a close eye on these new tax reforms. Ultimately, the more that all of us—as both employers and employees—educate ourselves, the better we can plan for the year ahead.