On December 22, President Trump signed the 2017 Tax Cuts and Jobs Act, making good on a campaign promise to overhaul the U.S. tax code. The law marks the most substantial tax reforms since the Reagan administration and a substantial win for Congressional Republicans heading into the new year.
With the president’s signature now dry, payroll professionals have been left to pick up the pieces and interpret the bill’s impact on themselves and their employers. From income tax brackets to the individual mandate, we’ve summed up all the areas affected by the historic law. Unless otherwise noted, all changes are in effect for the 2018 tax year.
Payroll Taxes and Forms
Your annual, taxable earnings determine which tax bracket you fall into. If you earn more, you pay more—that much hasn’t changed since last year. What has changed are the specific percentages and amounts involved. A breakdown of the new tax brackets are below.
- 10% - $0 to $9,525
- 12% - $9,526 to $38,700
- 22% - $38,701 to $82,500
- 24% - $82,501 to $157,500
- 32% - $157,501 to $200,000
- 35% - $200,001 to $500,000
- 37% - over $500,001
Married, Filing Jointly:
- 10% - $0 to $19,050
- 12% - $19,051 to $77,400
- 22% - $77,401 to $165,000
- 24% - $165,001 to $315,000
- 32% - $315,001 to $400,000
- 35% - $400,001 to $600,000
- 37% - Over $600,000
As part of this massive change, the IRS is expected to publish updated withholding tables and guidance later this month. An updated Form W-4 is also expected, but the agency is unlikely to require current employees to complete the form again.
The Affordable Care Act (ACA)
Under current law, businesses with 50 or more full-time employees are required to offer their employees insurance. Additionally, the IRS requires that these same businesses file forms confirming that they offered coverage. This so-called “employer mandate,” whose enforcement is expected to rake in $207 billion in revenue over the next decade, remains unchanged by the tax reform law.
What the bill does impact is the individual mandate, or the requirement that Americans purchase health coverage or face a fee come tax filing season. While not technically eliminating the mandate, the tax reform law lowers the penalty for noncompliance to $0.00, starting in 2019.
In short, while the law eliminates coverage requirements for individuals, it’s still business as usual for employers.
Earlier drafts of the bill saw a number of fringe benefits lose their favorable tax status, like educational assistance, dependant care, and adoption assistance. Thankfully for the employees who capitalize on these, the number of fringe benefits impacted was much smaller.
Starting this year, employees can no longer reimburse bicycle commuting costs with their pre-tax transit plan. Transit passes, vanpooling, and parking costs can still be reimbursed up to $260 per month.
Favorable treatment for qualified moving expenses also received the axe. That means any payments or reimbursements you need to make for employee relocation are now subject to federal taxes. Check with your payroll vendor to ensure that their system is updated to reflect these new rules.
Supplemental Tax Rates
If an employer pays its workers wages outside of a regular salary (like bonuses or severance payments), these awards are considered “supplemental” and are subject to a higher tax rate. The tax reform law changes these rates, effective immediately, to the below:
Supplemental Tax Rate (for wages up to $1 million): 22%
Supplemental Tax Rate (for wages beyond $1 million): 37%
Paid Family Leave
While stopping well short of a paid leave mandate, the law does set up new tax incentives for employers to offer the benefit. The FMLA (Family and Medical Leave Act) grants qualified individuals 12 weeks of unpaid, job protected leave. Now, businesses who offer employees at least 50 percent of their regular wages while out on FMLA leave qualify for a 12.5 percent tax credit. If the employee receives more than 50 percent of their wages while on leave, the tax credit can reach as much as 25 percent.
The Namely team will share additional updates as the IRS publishes guidance on how employers should proceed. Companies should remain in close contact with their third-party payroll vendors to ensure compliance with 2018 tax rates.