Employers – about the New Tax Laws
On December 22, 2017 a new tax bill was signed into law and it has and will impact almost everyone when it comes to taxes in the coming years. From individuals to corporations and small businesses, there are things employers should be aware of when it comes to tax laws.
How will the tax bill impact Employer payroll?
Employers can expect to see changes to wage withholding in 2018 because of the elimination or suspension of many exclusions and deductions. The seven individual federal income tax brackets currently in place will not change, but most of the rates will be lowered, including the highest marginal tax rate. The new rates of 10, 12, 22, 24, 32, 35, and 37 percent take effect Jan. 1, 2018, and expire Dec. 31, 2025.
Here is a breakdown on deductions and tax rate cuts:
- S-Corps, LLCs, and Partnerships will receive a 20% deduction in pass-through income. This will apply to anyone in a service business unless their taxable income is $315,000 for a married couple or $157,500 for an individual.
- Pass-Through Tax Break Rule: If the owner or partners draw a salary from the business, that money would be subject to ordinary income tax rates. This law places limits on how much income qualifies for the pass-through deduction.
- Corporate Tax Rate: The corporate tax rate is cut from 35% to 21% at least until 2025 but is expected to continue beyond that. The new law also repeals the AMT on Corporations.
New W-4 Forms
The new tax bill suspends personal exemptions and will continue to do so till 2025 at this point. Therefore, Employee’s Withholding Allowance or Form W-4, will eventually need to be changed However, the 2018 tables have been set-up to work with the existing W-4 form. So both employers and employees can use those existing forms until the Internal Revenue Service (IRS) has designed the new form which will not be released before the 2019 tax year.
You and your employees can go to IRS.gov and look at the withholding tax calculator to help determine your withholdings.
How Does this Effect Non-Resident Aliens Withholding?
The IRS defines an alien as “any individual who is not a U.S. citizen or U.S. national or anyone who has not passed the green card test or the substantial presence test.” The amount added to Nonresident Alien Employee wages for calculating withholding has almost tripled for 2018.
State Withholding
If you employ workers in a state with income tax withholding policies that use the federal personal exemption, the new tax law will affect you. Because of the elimination of personal exemptions, states that plan to follow the federal system in 2018 will have to change their withholding methods as well. There are 30 states that allow use of the federal Form W-4, Employee’s Withholding Allowance Certificate. These states may have to change their policies this year (2018) and going forward.
Personal Exemptions Will Now Be Replaced by Allowances
Unfortunately, the new tax law does not explain what an allowance amount is. The IRS will need to decide whether an allowance is equivalent to a personal exemption and/or equal to a specific amount. This must be decided before the new W-4 form is created.
Supplemental Wages/Bonuses and Transportation Changes
Supplemental wages – bonuses and commissions flat rate has gone from 25% to 22%. The federal income tax withholding rate on supplemental wages exceeding $1 million has gone from to 37% from 39.6%.
Employees can deduct up to $260 per month for commuting costs including $20 for biking expenses. However, as an employer you can no longer claim a deduction for qualified mass transit and parking benefits for your employees except when necessary for their safety. So, if you have been covering those commuter costs for your employees, you will no longer get that tax break.
A note about company cars: The new law also raises the cap placed on depreciation write-offs of business-use vehicles. The new cap will be $10,000 for the first year a vehicle is in service, $16,000 for the second year, $ 9,600 for the third year, and $5,760 for each subsequent year until costs are fully recovered.
Moving Expenses are Eliminated
Tax-free moving-expenses were eliminated as of Jan. 1, 2018. Employees will no longer be able to deduct moving expenses. If an employer wishes to cover moving expenses for an employee, he or she must now include that as wages. Therefore, moving expenses that used to be considered non-taxable reimbursements will now be taxed like any other earnings.
Backup Withholding for Contractors is Reduced.
Employers usually report these withholdings on Form 1099-MISC (Miscellaneous Income).
Backup withholding has been reduced from 28% to 24%.
Employee Benefits – Money in their Pockets – No ACA Penalties
Employees will see a slight raise in their paychecks due to the new tax law, at least unto 2025. The ACA will no longer carry a penalty for lack of health coverage by 2019 as the Individual Mandate has been eliminated.
You may see fewer employees enroll in 2019, but as an employer, you should continue to offer compliant coverage. If you don’t offer your employees coverage as expected for your size business, note that the IRS is expected to begin issuing penalties.
The child tax credit has been expanded and will double from $1000 to $2,000 for children under the age of 17. The income threshold to be eligible for this credit was raised to $200,000 for individuals and $400,000 for married couples. The Non-Child Dependent Credit will be $500 for each non-child dependent who is supported, ages 17 or older.
Ask for Help
This bill is complicated with a lot of moving parts. There are many other benefits and changes for individuals and families filing their taxes in the coming years. The hopes for this tax bill is that the break you get as employers will help you going forward and will allow you to employ more people and offer better wages and better work environments for your employees.
If you need advice on any aspect of the new tax law and how this bill is going to affect you, please feel free to contact us. We will be happy to answer any questions you may have.