With the enactment of tax reform legislation, comes changes to income-tax withholding tables. The IRS released Notice 1036 in mid-January, which effectively updates the income-tax withholding tables for 2018. This matters to business owners, as the new withholding tables show the rates employers need to use during 2018.
What are the new withholding tables?
A withholding table is used by your employer or payroll provider to determine the amount of tax withheld from your paycheck.
These new tables reflect increases in standard deductions, changes in tax rates and brackets and the repeal of personal exemptions. For more information on the impact of tax reform on individuals, check out this article.
The 2018 withholding tables are supposed to help employees have the correct amount of tax withheld. This will, hopefully, prevent over and under withholding.
Previous tax legislation had income (salaries, interest income, etc.) subject to a seven-bracket progressive system, with a top rate of 39.6%. The new law kept the seven-bracket system, but reduced most of the tax rates. For instance, a single tax payer at an income level of $38,700 - $82,500 is now taxed at 22% as opposed to the previous 25% tax rate. The bill also changed the top rate from 39.6 to 37%.
Nearly every taxpayer is affected by this change. Employees will begin to see increases in their paychecks in February, depending on when you, as their employer, implement the new tables and the type of pay schedule your company is on (bi-weekly, monthly, etc.).
When do I need to start using the new tables?
Employers need to begin using the 2018 withholding tables as soon as possible. At the very latest, these withholding tables need to be in place by February 15, 2018. You’ll need to continue to use the 2017 withholding tables until you implement the 2018 withholding tables.
What else do I need to know?
The new withholding tables are designed to work with Forms W-4. This is the one your employees file to claim withholding allowances.
The IRS is currently revising Form W-4 and the IRS withholding calculator (expected be ready in February). These measures will help with tax reform changes, including the child tax credit, the new dependent credit and repeal of dependent exemptions.
Until a new Form W-4 is issued, employees and employers can use the 2017 Form W-4.
What are my next steps?
Review the withholding tables and ensure your business is in compliance by no later than February 15. Also, be watching for the newly released Form W-4, as your employees may need to update their information with this new form.
Not sure how to implement the new withholding tax tables? Our Business Outsourcing & Strategy professionals are here to help.