The Tax Cuts and Jobs Act is a United States Congressional bill to amend the Internal Revenue Code of 1986, effectively altering the rate of taxation for individuals and businesses.
Major components of the bill include:
• Reducing tax rates for individuals and businesses;
• Increasing the standard deduction and family tax credits;
• Limiting the mortgage interest deduction;
• Limiting the Alternative Minimum Tax for individuals and eliminating it for corporations;
• Reducing the number of estates impacted by the estate tax; and
• Reducing the penalty for the individual mandate of the Affordable Care Act (ACA).
There are several provisions of the law affecting businesses and individuals alike, some of which are of particular concern to payroll management. In addition to lowering tax rates, the law also eliminates personal exemptions and a few pre-tax benefits.
What Employers Need to Know
The Act eliminates all personal exemptions. The withholding rules will be modified to reflect the fact that individuals can no longer claim personal exemptions. The Act increases the standard deduction for taxpayers to the following:
• $24,000 for married taxpayers filing jointly,
• $18,000 for heads of households, and
• $12,000 for all other individuals.
The bill does not change the additional standard deduction for elderly and blind taxpayers.
Impact on Payroll
Since personal exemptions were eliminated, this requires changes to Federal Form W-4, Employee’s Withholding Allowance Certificate. IRS has stated that a new form may not be released until March 2018. Until the new form is available, employers must use the prior versions. Any exemptions claimed on Form W-4’s completed before the new form is released will be null. The removal of personal exemptions will happen concurrently with the release of the new withholding tables. Paylocity will update the new version of the Form W-4 as soon as the IRS publishes it.
Tax rates will reduce for all tax brackets for both Married and Single Taxpayers with the highest tax bracket dropping to 37%. This also sets the Supplemental Tax Rate to 22% for supplemental wages up to $1 million and to 37% for supplemental wages over $1 million for any bonus payments made after January 1, 2018. Below is a chart of how the tax brackets will change:
Impact on Payroll
IRS has indicated new withholding tables will be published as early as sometime in January. The reduced supplemental tax rate will need to be applied to any bonuses paid after the first of the year. Paylocity will update the supplemental tax rates in WebPay so any bonuses paid after January 1, 2018 are taxed at the correct rate of 22% or 37% based on amount. IRS has indicated the new tables will have an implementation deadline of sometime in February. Details on these changes will be communicated as they are rolled out.
Several items that previously were not subject to Federal Employment Tax are now required to be added to gross wages and subject to Federal Income, Social Security, Medicare and FUTA taxes.
Moving Expense Reimbursements: Qualified moving expenses must now be included in gross income and wages; except in the case of an armed forces member on active duty who moves pursuant to a military order.
Exclusion for Bicycle Commuting Reimbursements: An employer may no longer exclude up to $20 per month in reimbursements to an employee for bicycle commuting costs.
Employee Achievement Awards: The value of all noncash awards given to an employee for length of service or safety achievement under a qualified plan are excluded from the employee’s wages and are exempt from Federal Income Tax Withholding up to $1,600 per year. This exclusion does not apply to cash, gift cards, and other non-tangible personal property to be included in the award and must be appropriately taxed if included.
Impact on Payroll
Employers will need to update any deductions used for these reimbursements to include them as wages subject to Federal Income Tax Withholding, Social Security, Medicare and FUTA taxes. Employers may need to review custom deductions to ensure updates are made to taxability. Details on these changes will be communicated as they are rolled out.
Business Income Tax Deductions Eliminated
The Act also contains repeals of deductions from business income tax such as:
Eating Facilities (meals furnished for convenience of employer): The business deduction is now limited to 50%.
Entertainment Expenses: The business deduction for expenses incurred is disallowed.
Settlements – Sexual Harassment: The business deduction for settlements paid and related attorney’s fees for sexual harassment is disallowed if contingent on a nondisclosure agreement.
Transportation Fringe Benefits: Transportation fringe benefits are still excludable from Income for Employees, but the business deduction is eliminated.
Affordable Care Act
The law reduces to zero the amount of the penalty under Sec. 5000A, imposed on taxpayers who do not obtain insurance that provides at least minimum essential coverage, effective after January 1, 2019.
Impact on Payroll
Reducing the penalty on the individual mandate does not remove the Employer Reporting required by the ACA. Employers are still required to file forms 1095/1094C.
A new subsection (i) under IRC §83 will be created for the deferral of private company stock options from wages subject to federal income tax and federal income tax withholding. New reporting requirements apply under this new provision.
Impact on Payroll
IRS will need to provide guidance for any new reporting requirements under this new subsection of the IRS. Paylocity’s Government Relations Team will closely monitor this through the IRS Stakeholder Liaison Representative.
Family and Medical Paid Leave
A business tax credit is now available if certain requirements are met. Qualified paid leave does not include paid family leave benefits provided under a state plan.
Impact on Payroll
Employers may need to track leave in order to determine eligibility of the credit. Paylocity will monitor the requirements and determine any required changes to reports or analytics to aid Employers in determining eligibility.
Other Areas of Interest for Employers
Child Tax Credit
The law increases the amount of the child tax credit to $2,000 per qualifying child.
• The maximum refundable amount of the credit is $1,400.
• The law also creates a nonrefundable $500 credit for qualifying dependents who are not qualifying children.
The threshold at which the credit begins to phase out is increased to $400,000 for married taxpayers filing a joint return and $200,000 for other taxpayers.
Retirement Plan Loan Offset
Employees whose 401K plan terminates or who separate from employment while they have plan loans outstanding now have until the due date for filing their federal income tax return for that year to contribute the loan balance to an IRA in order to avoid the loan from being taxed as a distribution.
Wage Advances and Repayments That Cross Tax Years
If the repayment of a wage advance or overpayment crosses tax years and the advance/overpayment is less than $3,000, employees are no longer allowed to itemize their deductions in order to claim a federal income tax credit on the repayment.
Employee Unreimbursed Business Expenses
Employees are no longer able to claim an itemized deduction for businesses expenses incurred on behalf of the employer but not reimbursed by the employer.
Alternative Minimum Tax
For tax years beginning after Dec. 31, 2017, the alternative minimum tax (AMT) exemption amount increases to $109,400 for married taxpayers filing a joint return and $70,300 for most other taxpayers. The phase out thresholds are increased to $1 million for married taxpayers filing a joint return and $500,000 for most other taxpayers. The exemption and threshold amounts are indexed for inflation.
The bill would modify Sec. 529 plans to allow them to distribute no more than $10,000 in expenses for tuition incurred during the tax year at an elementary or secondary school. This limitation applies on a per-student basis, rather than a per-account basis. Otherwise, there are no changes to major education deductions and credits or to the teacher deduction for unreimbursed classroom expenses.
Pass-through Income Deduction and Corporate Income Tax Rate
The Corporate Income Tax rate is reduced from 35% to 21%. Beginning in 2018, individuals are allowed to deduct 20% of “qualified business income” from a partnership, S corporation, or sole proprietorships.
State and Local Tax Deduction
The deduction for state and local property, sales, or income taxes is now limited to $10,000.
A Final Note
Many provisions of this bill are set to expire on December 31, 2025. If no legislation is passed to extend the tax changes beyond that date, tax rates and exemption rules will revert to current law. Additionally, there were several provisions in the House Bill that were not ultimately adopted in the final bill, including a proposed change to require quarterly wage reporting on Federal Form 941’s and an elimination of Work Opportunity Tax Credits as well as several income excluded Fringe Benefits.
Regardless of the extent of changes employers are faced with due to legislative changes, you can rest assured that Paylocity is staying up to date and ensuring your business is ready to comply with any and all new requirements.
Thank you for choosing Paylocity as your Payroll Tax partner. Should you have any questions please contact your Paylocity Account Manager.
This information is provided as a courtesy, may change and is not intended as legal or tax guidance. Employers with questions or concerns outside the scope of a Payroll Service Provider are encouraged to seek the advice of a qualified CPA, Tax Attorney or Advisor.