Federal Tax Reform Guide

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:

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.

Update: The 2019 W-4 is now available.

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.

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. In October 2018, the IRS issued Notice 2018-71 on the credit.

Federal Tax Reform Guide

Posted: January 2, 2018 Updated: December 10, 2018

Federal Tax Reform: What It Means for Your Business

2018 Form W-4:

2019 Form W-4:

State Forms W-4 May Also Change:

Supplemental Wage Withholding Rate Clarified:

Qualified Transportation Fringe Benefits:

Qualified Bicycle Commuting Expenses: