On Dec. 22, 2017, one of the most significant reforms of the United States Tax Code in over three decades was signed into law. The new law, called the Tax Cuts and Job Act (TCJA), came into effect on Jan. 1, 2018 and significantly changed corporate and individual taxation.
Across the country, taxpayers are struggling to understand the implications of the new law and how it will impact their tax returns come 2019. Some of the significant changes made by the Tax Cuts and Job Act include:
Discontinued and limited certain deductions.
Increased Child Tax Credit.
Eliminated personal exemptions.
Increased standard deductions.
Since these changes have a significant impact on withholding amounts, there is a risk individuals' annual withholding may not be adequate to cover the full tax liability. Let's take a more incisive look at the effects of the Tax Cuts and Job Act.
Payroll Tax Withholding Amounts
The new tax law made sweeping changes to the tax brackets and rates of individuals, payroll systems updated their withholding tax tables to reflect the new IRS calculations and employee withholding amounts were recalibrated. But does the employer obligation stop there?
To help individuals better understand the impact of TCJA on their taxes, the IRS has provided a user-friendly set of tools. It has updated its withholding tax calculator, Publication 505 and Tax Withholding and Estimated Tax to incorporate the new changes. It has also embarked on educational efforts to help employees determine the correct amount of taxes deducted from their pay.
The IRS was expected to revise the 2019 W-4 to reflect the new tax act. Due to push back in the payroll community, these changes have been slated to be released in the spring/summer of 2019 for the 2020 W-4 instead. However, it is always advisable for employees to fill in a new W-4 each year or when there are changes to financial or personal situations such as marriage, children and a big raise, among others.
Reviewing Withholding Amounts
The best advice an employer can give employees is to use the withholding tax calculator to check their withholding amounts to ensure that it's not too little. If it is, they will receive a likely unexpected tax bill during tax time next year. They could potentially also be subject to penalties for underpayment.
The IRS states that penalties may result if the total payments made from estimated and withholding tax aren't equal to at least 90 percent of the yearly tax liability or 100 percent of the amount paid in the previous tax year.
The following categories of people are those that are most affected by the Tax Cuts and Job Act.
Individuals who itemized deductions in 2017.
Individuals with dependents under age 17 or who claim credits such as the Child Tax Credit.
Individuals who work part of the year or hold two or more jobs at the same time.
Individuals with large tax bills or tax refund for 2017.
Communicating with Employees
No employer is a substitute for a tax advisor, so care must be taken to ensure any communication to employees about validating their tax withholding adequacy is properly worded. Time is running out for individuals to adjust their full-year withholding without significantly impacting their take-home pay. By issuing a recommendation to use the IRS calculator or to check in with a tax professional can deflect any potential ire or confusion should an employee end up with a tax bill instead of a refund next year!
Your communication could be as simple as "It is advised that you do a withholding check as soon as possible. You can use the IRS withholding calculator, which has been updated to incorporate the new tax changes. When using the calculator, ensure that you have your recent pay stubs, earned income tax credit, number of children eligible for Child Tax Credit and an estimated value of your income for the present year.
After checking your withholding amounts, if you find that changes are necessary, fill out a new W-4 and submit it to your Payroll Department or make the changes online in your employee self-service portal."
While employers are not obligated beyond applying the correct tax withholding calculations to each employee paycheck, the impact of the level and complexity of changes in the tax cuts and job act is unknown. By giving your employees a "heads up," you may save them from a big surprise come tax time next year!