The Tax Cuts and Jobs Act, which President Trump signed into law in December of 2017, has several tax law provisions which impact various aspects of payroll and HR administration. Employers should be aware of the following tax law changes which became effective in 2018:
MOVING EXPENSES AND EMPLOYER REIMBURSEMENTS
The new tax law eliminated all tax deductions pertaining to a taxpayer making a job-related move (with an exception for military personnel). Essentially, the days of a taxpayer writing off various types of moving expenses on a personal tax Form 3903 are now gone. Since moving expenses are no longer tax-deductible, a reimbursement of moving expenses by an employer to an employee is totally taxable—-for all types of payroll tax withholdings. Employers who choose to pay all moving expenses and their related taxes so that the new employee pays zero costs for their move, will need to “gross up” their reimbursement to factor in the various taxes which the employee will pay on the “moving expense reimbursement”. Special W-2 coding to report moving expenses is no longer required since moving expense reimbursements are no longer “tax favored”.
SUPPLEMENTAL WAGE TAX WITHHOLDING RATE
The IRS has long required that a “fixed” percentage of taxes be withheld for so called “supplemental wages” paid to employees. Supplemental wages are those which are “irregular”, such as bonuses, commissions, special compensation payouts. For year 2018, the supplemental wage federal income tax withholding rate has been reduced to a flat 22%——due to the overall reduction in federal income tax rates of the new tax law.
EMPLOYEE BUSINESS EXPENSES/ACCOUNTABLE EXPENSE REIMBURSEMENT PLANS
Prior to enactment of the new tax law, employees could “write off” their unreimbursed job-related expenses, as a “miscellaneous itemized deduction”. As such, unreimbursed business driving, travel, supplies, tools, uniforms, etc could be reported as deductions on a person’s Form 1040. The new tax law totally eliminates deductions for “employee business expenses.” However, IF an employer reimburses an employee for job-related expenses pursuant to a documented “accountable expense reimbursement plan,” the reimbursement will not be taxed, and will generally be deductible to the employer(with limitations for business entertainment, club dues, etc). An employee who personally pays for significant out-of-pocket “employee business expenses” would benefit by “swapping some taxable wages” in exchange for “accountable expense reimbursements” from their employer. An “accountable expense reimbursement plan” is one in which the employee must provide “proof” and documentation of the business expense to their employer——-an auto business log, receipts for supplies, etc. An “auto allowance” of $500 per month, with no documentation by the employee to the employer of actual business miles driven, is not considered an “accountable plan”. “Allowances” are generally taxed the same as wages to the employee, and the employee can no longer track and deduct their actual business expenses on their personal Form 1040.
S CORPORATIONS—SETTING OWNERS’ SALARIES NOW MORE IMPORTANT THAN EVER
A central objective of the new tax law was a reduction in corporation tax rates, from 35% to 21%, so that corporations would have more after-tax funds for expansion, job incentives, etc.Since the majority of small to medium sized businesses in America are not taxed at the corporate level, but instead are taxed via K-1 schedules to the owners at personal income tax rates, the new tax law created a new tax deduction in which many (not all) S corporations, sole proprietors and LLC’s can claim a “tax deduction” equal to 20% of the company’s annual net income, with the “other 80%” being taxed at the owners’ individual tax rates (this law is extremely complex, with many exceptions to the general rules). IF owners of a S corporation (or LLC taxed as a S corporation) reduce their wages/salaries paid via payroll, the result is a lower owner W-2 amount and higher business net income (less wages to owner, higher net income of the business). With the brand new “20% net income” deduction legislated by the new law, first effective for year 2018, “setting the owners’ compensation” for payroll takes on even greater significance than in past years—-NOTE—-the IRS still requires that employee-shareholders of S corporations be paid “reasonable compensation” by the S corporation. Every S corporation, including LLC’s taxed as S corporations, need to consult with their CPA’s/tax advisors regarding “setting” their compensation amounts at “reasonable” (on the low side!!) amounts for year 2018.Many factors come into play in setting “reasonable compensation” levels for “owners”, to include the impact various salary levels have on permitted contributions to employer-sponsored retirement plans. Check with your tax advisor now about “setting” owners’ compensation levels for year 2018.
EMPLOYEES NEED TO REVIEW THEIR 2018 FEDERAL INCOME TAX WITHHOLDINGS—ENOUGH BEING WITHHELD?
We have written two PayDay’s this year about what AccuPay considers the “flaws” in the 2018 IRS tax tables and new 2018 W-4 forms. Our sense is that the new 2018 tax tables and W-4 forms were “rushed” in order to create larger payroll checks as early as possible in 2018, and the IRS has sent out several communications this year advising taxpayers to “check their 2018 tax withholdings”. Their concern, as is ours, is that some taxpayers will end up owing taxes when they file their 2018 Form 1040’s by April 15th of 2019. We recommend that employers encourage their employees to check their IRS withholdings YTD this year, and to adjust their 2018 W-4 forms as needed to prevent large balances of tax due next Spring.
Employers need to be aware of how the Tax Cuts and Jobs Act tax provisions affect their administation of payroll and HR functions.Employees need to check the sufficiency of their 2018 federal tax withholdings since the new tax law eliminates “exemptions/allowances” as deductions for year 2018. AccuPay’s CPP/CPA advisors and specialists are happy to answer your questions about the new tax law as it impacts payroll in 2018—–simply call your dedicated payroll specialist at 317-885-7600.