Federal Tax Reform: What It Means for Your Business
H.R. 1, the Tax Cuts and Jobs Act (the Act), was enacted on December 22, 2017 and generally became effective on January 1, 2018. In addition to a reduction in the corporate tax rate, the Act includes several significant changes that will impact payroll, employment tax, and employee benefits. Below is a summary of many of these changes. This guide will be updated as additional information, guidance, and resources become available. Employers should review the Act in detail and consult with appropriate legal and tax professionals before taking any action.
In January, the IRS released Notice 1036, which updates the income-tax withholding tables for 2018 to reflect changes made by the Act. The new tables reflect the increase in the standard deduction, repeal of personal exemptions and changes in tax rates and brackets.
Employers were required to begin using the 2018 withholding tables by February 15, 2018. ADP implemented these changes in RUN Powered by ADP® on January 19, 2018, 6 a.m. ET (for payrolls processed on or after that date/time).
2018 Form W-4
On February 28, 2018, the IRS released a new Form W-4 (Employee's Withholding Allowance Certificate) for 2018. Employees use the Form W-4 to establish marital status and withholding allowances for federal income tax withholding calculations.
New hires who complete a W-4 on or after March 30, 2018 must use the 2018 W-4. In the meantime, the IRS is allowing new hires to use the 2017 W-4.
The IRS will not require all employees to file new Forms W-4. However, employees who have previously furnished a W-4 may be required to file a new one if they have a change in their tax status (e.g., divorce) that would reduce the allowances to which they are entitled. Even in the absence of a requirement to complete a new W-4, it is advisable that employees review their withholding for 2018. For example, the Act eliminated personal exemptions, so if any withholding allowances on file represent personal exemptions, an employee's withholding allowances may be overstated for 2018, which could result in tax under-withholding. To some extent, the new withholding tables adjusted for this and other factors, however, as a best practice employees should check their withholding and some may want to file a new W-4 with their employer to help avoid possible over or under withholding from their paychecks.
According to the IRS, employees who previously itemized their deductions, have two or more jobs in their household, or have dependents, should check their withholdings.
Employees who need to submit a new W-4 must begin using the 2018 W-4 by March 30, 2018. Up until then, they may use the 2017 Form W-4.
The IRS also released an updated withholding calculator that employees can use to check their withholding. The calculator will ask a number of questions about income, marital status, anticipated deductions and eligibility for tax credits, to estimate annual taxable income and suggest the most appropriate number of withholding allowances.
Employers should notify employees of the 2018 Form W-4 and withholding calculator. Here's a sample notice to employees.
2019 Form W-4
Updated September 2018: On June 6, 2018, the IRS released a draft W-4 for 2019. The draft contained significant changes. However, on September 20, 2018 the IRS issued a statement that the proposed changes have been delayed until 2020. The IRS said it will release a Form W-4 for 2019 that will be similar to the current 2018 version. We will continue to monitor developments on the W-4 and post updates here.
State Forms W-4 May Also Change
Many states maintain tax laws that are closely aligned with federal law, and many states permit employers to rely on the federal Form W-4 for state income tax withholding purposes. The elimination of personal exemptions in federal law may cause several states to revise their equivalent withholding allowances forms and/or issue new guidance to employers.
Supplemental Wage Withholding Rate Clarified
Updated January 12, 2018: In Notice 1036, the IRS also clarified withholding on supplemental wages, such as bonuses, under the Act. When an employee receives $1 million or less in supplemental wages during 2018 and those wages are identified separately from regular wages, the flat withholding is 22 percent. When an employee receives in excess of $1 million in supplemental wages, the withholding on the excess is 37 percent, according to the IRS.
Qualified Transportation Fringe Benefits
Currently, employers are able to offer qualified transportation fringe benefits, such as mass transit passes and qualified parking, on a pretax basis (i.e., excludable from an employee's taxable income and excluded from wages for employment tax purposes). For 2017, the maximum monthly exclusion for qualified parking, and for commuter highway vehicle transportation and transit passes is $255. Employers may generally deduct these expenses.
Effective for tax years beginning after December 31, 2017, the Act repeals the employer deduction for expenses related to qualified transportation fringe benefits, or for any expenses incurred for providing, paying, or reimbursing any employee's expenses for travel between home and work except expenses deemed necessary for ensuring the safety of an employee. Qualified transportation fringe benefits will remain tax exempt to employees, and such benefits can still be offered to employees on a pretax basis (i.e., excluded from income for FIT, Social Security/Medicare, and FUTA purposes).
Qualified Bicycle Commuting Expenses
In 2017, qualified bicycle commuting reimbursements of up to $20 per month could be offered as a tax-free benefit (i.e., excludable from an employee's taxable income and excluded from wages for employment tax purposes), for employees who regularly use a bicycle to travel to a place of employment, and during which the employee does not receive transportation via a commuter highway vehicle, a transit pass, or qualified parking from an employer.
The Act repeals this provision, effective for taxable years beginning after 2017 and before 2026. For these years, qualified bicycle commuting expenses can no longer be offered on a pretax basis to employees, but employers can continue to deduct expenses for bicycle commuting expenses paid or incurred after December 31, 2017, and before January 1, 2026.
Currently, an employer's deduction for the cost of an employee achievement award is limited to a certain amount. Employee achievement awards that are deductible by an employer are excludable from an employee's gross income. Amounts that are excludable from gross income under Section 74(c) for income tax purposes are also excluded from wages for employment tax purposes. An employee achievement award is an item of tangible personal property given to an employee in recognition of either length of service or safety achievement, and presented as part of a meaningful presentation.
The Act adds a definition of "tangible personal property" that may be considered a deductible employee achievement award. It provides that tangible personal property shall not include cash, cash equivalents, gift cards, gift coupons, or gift certificates (other than arrangements conferring the right to select from a limited array of such items pre-approved by the employer), or vacations, meals, lodging, tickets to theater or sporting events, stocks, bonds, other securities, and other similar items.
This provision is effective for amounts paid or incurred after 2017. However, this definition is already considered to be in effect under proposed regulation 1.274-8, so the Act would codify the definition into statute. The Joint Committee on Taxation noted that "no inference is intended that this is a change from present law and guidance."
Currently, employers may deduct expenses for entertainment, amusement, recreational activities, and membership dues with respect to any club organized for business, pleasure, recreation or any other social purpose, if the expenses relate to the conduct of the taxpayer's trade or business. The deduction is generally limited to 50% of otherwise deductible expenses.
Beginning in 2018, the Act eliminates the employer's deduction for entertainment, amusement, recreational activities or membership dues relating to a business, pleasure, recreation or other social purpose, or any facility used in connection with any of the above items. Employers may still deduct 50% of otherwise deductible food and beverage expenses (e.g., meals consumed by employees on work travel).
For amounts incurred and paid after December 31, 2017 and through December 31, 2025, the Act expands the 50% expense limitation to employer expenses associated with providing food and beverages to employees through an on-premises eating facility that meets requirements for de minimis fringes, and for the convenience of the employer. No deduction will be permitted after 2025.
Currently, qualified moving expense reimbursements are excluded from an employee's gross income for income tax purposes, and are excluded from wages for employment tax purposes. Qualified moving expense reimbursements are defined as any amount received directly or indirectly from an employer as payment for (or reimbursement of) expenses which would be deductible as moving expenses under Section 217, if directly paid or incurred by the employee.
The Act repeals the exclusion from gross income and wages for qualified moving expense reimbursements, except in the case of a member of the Armed Forces of the United States on active duty who moves pursuant to a military order. This provision is effective for tax years beginning after December 31, 2017.
Effective January 1, a new subsection (i) of Code Section 83 is established for the deferral of broad-based, private company stock options and restricted stock units from wages subject to federal income tax and tax withholding of rank-and-file employees. The provision establishes new reporting requirements, which will be defined through regulations.
For taxable years beginning after January 1, 2018, eligible employers may claim a general business credit equal to 12.5% of wages paid to qualifying employees during any period in which such employees are on paid family and medical leave, if the rate of payment under the program is at least 50% of the wages normally paid to an employee. The credit is increased by 0.25 percentage points (but not above 25%) for each percentage point by which the rate of payment exceeds 50%.
- For example, if an employee on family and medical leave is paid 60% of their normal wages, the credit would increase to 15% of the wage amount (12.5% plus (10% x 0.25 = 2.5%), which equals 15%).
- An employee paid 100% of their normal wage amount would generate a credit equal to 25% of the wage amount (12.5% plus (50% x 0.25 = 12.5%), which equals 25%).
The maximum amount of family and medical leave that may be taken into account with respect to any employee for any year is 12 weeks. An eligible employer is one who has in place a written policy that allows all qualifying full-time employees not less than two weeks of annual paid family and medical leave, and who allows all less-than-full-time qualifying employees a commensurate amount of leave on a pro rata basis. To qualify for the credit for 2018, the full-time or less-than-full-time employee must work for the employer for at least one year and must not be compensated in excess of $72,000 (this threshold may be different for 2019).
Covered family and medical leave is that which is provided for any one or more of the purposes described under the federal Family Leave and Medical Leave Act (FMLA). Employers cannot provide such leave as vacation, personal, or other types of leave.
Both employers covered by and those not covered by the FMLA may claim the tax credit. However, if the employer is not covered by the FMLA, the employer's written policy must include both of the following provisions for the employer to be eligible for the tax credit:
- The employer will not interfere with, restrain, or deny the exercise of or the attempt to exercise, any right provided under the policy, and
- The employer will not discharge or in any other manner discriminate against any individual for opposing any practice prohibited by the policy.
This tax credit is available for the 2018 and 2019 tax years only unless it is extended.
On April 9, 2018, the IRS published answers to frequently asked questions on the tax credit, which can be found here.
A "qualifying employee" is any employee who has been employed for one year or more, and who, for the preceding year, had compensation not in excess of 60 percent of the compensation threshold for highly compensated employees (i.e., $72,000 for 2018 (60% of $120,000)).
If an employer provides paid leave as vacation leave, personal leave, or other medical or sick leave, this paid leave would not be considered to be family and medical leave. Leave paid for or required by a state or local government is also not taken into account.
There are many details to be determined through regulations, which are likely to take several months to complete. Employers who wish to take advantage of the new tax credit should consult with their legal and tax advisors. This tax credit would not apply to wages paid in taxable years beginning after 2019. to be added once approved.
Although not directly related to employers, the Act eliminates the Affordable Care Act (ACA)'s individual mandate penalties. The ACA requires that individuals maintain health coverage that provides at least minimum essential coverage (MEC) or be subject to a penalty for any month they do not have MEC unless the individual qualifies for an exemption for the month. The "individual mandate" remains in effect through 2018; however, the Act reduces the amount of the individual responsibility penalty to zero, effective in 2019.
The ACA employer mandate (Section 4980H of the Internal Revenue Code (Code)) remains in effect. Applicable Large Employers (generally those with 50 or more full-time employees and full-time equivalent employees in the prior year), continue to be subject to the ACA coverage, reporting, and other applicable obligations.
The Act bars employers from claiming a deduction for any settlement or payment related to sexual harassment or sexual abuse if it is subject to a nondisclosure agreement. In such cases, employers would also be prohibited from claiming a deduction for attorney's fees. These changes apply to amounts paid or incurred after December 22, 2017.
Posted: January 2, 2018
Last Updated: September 27, 2018