On December 22, President Trump signed H.R. 1, also known as the Tax Cuts and Jobs Act, into law. The legislation, which marks the most sweeping tax changes in 30 years, will impact payroll professionals by changing the taxability of two fringe benefits and affecting income tax withholding in 2018 and beyond. Because this tax legislation was passed so late in 2017, the IRS will not issue withholding guidance for 2018 until January.
Fringe benefit changes
For tax years 2018 through 2025, the legislation suspends the fringe benefits for qualified moving expenses and qualified bicycle commuting costs.
Affordable Care Act (ACA)
This legislation does not change the obligation of applicable large employers to offer ACA-compliant insurance to their full-time employees and to report on the offer. However, it does effectively eliminate the individual mandate by reducing the penalty for not purchasing insurance to zero beginning in tax years after December 31, 2018.
Supplemental and backup withholding rates
Supplemental rate for wages exceeding $1 million. For 2017, the mandatory withholding rate on supplemental wages exceeding $1 million is 39.6%. The legislation effectively lowers that rate to 37% for tax years 2018 through 2025.
Supplemental rate for wages up to $1 million. Because the tax rate on supplemental wages of up to $1 million is tied to a section of the Internal Revenue Code that is suspended for tax years 2018 through 2025 by the tax reform legislation (§1(i)(2)), it appears that the withholding rate will increase to 28% (from 25%) for those years, but the IRS has not yet confirmed the new rate.
Backup withholding rate. The backup withholding rate will be reduced from 28% (in effect for 2017) to 24% for tax years 2018 through 2025.
Additional information from APA
Additional information on the tax reform legislation will appear in the January issue of Payroll Currently. Also, on January 18, APA will present the webinar Tax Reform: How Will It Impact Your Payroll Process?, which will provide an overview of how the legislation will impact payroll in 2018 and beyond. This webinar is free for APA members.