Congress passed the Tax Cuts and Jobs Act (the “Act”), and it was signed into law in December 2017. The changes to the Internal Revenue Code (IRC) will be substantial. The Act, in its official electronic version, is 185 pages long. There are payroll impacts that are important to note and are summarized below.
Tax Rates and Withholding Calculations
Some of the most widely discussed changes included in the Act are the reductions in tax rates and the number of tax brackets (down to only seven in 2018). In addition, the Act increased the standard deduction to $24,000 for joint filers, $18,000 for head-of-household filers, and $12,000 for all others. However, the personal exemption is suspended until December 31, 2025. As a result, the withholding tables and resulting calculations will change, meaning your payroll system will need to be updated.
But don’t rush to make the changes! The Act provides a grace period for the Internal Revenue Service (IRS) to make changes to the withholding tables and rules. If the IRS chooses, the withholding rules in effect for 2017 may remain in effect for 2018. As of the date of this notice, all indications are that the IRS has selected that option and plans to modify the withholding tables and percentage method charts to work with the current W-4. This is a small reprieve for now, but that simply means that W-4s will need to be changed—and employees will need to resubmit them—for the 2019 tax year.
Notice 1036 should be published by the IRS in January and will provide the final set of guidelines for withholding in 2018. Those changes may need to go into effect as soon as February, so be certain to keep a look out for the Notice.
Employee Achievement Awards
The definition of “tangible personal property” for purposes of deductible employee achievement awards under IRC § 274 has changed. Under the new provision, tangible personal property cannot include cash, cash equivalents, gift cards, gift coupons, or gift certificates (other than arrangements conferring only the right to select and receive tangible personal property from a limited array of such items pre-selected or pre-approved by the employer), or vacations, meals, lodging, tickets to theater or sporting events, stocks, bonds, other securities, and any other similar items. This provision takes effect for all tax periods after December 31, 2017. No sunset provision is currently applicable to this new rule.
Under prior law, qualified expenses reimbursed to an employee by the employer related to moving were excludable from the employee’s income. Any expenses that the employee could personally deduct under IRC § 217 qualified for this exemption if paid by the employer. The Act repealed this exclusion in its entirety for all tax periods after December 31, 2017, though the removal of the exclusion is due to sunset on December 31, 2025.
The Act made substantial changes in the area of fringe benefits, altering the mechanics of several favored benefits. Most prominent, the Act removed the deduction for (1) any activity considered to be entertainment, amusement, or recreation; (2) membership dues with respect to any club organized for business, pleasure, recreation, or other social purposes; or (3) a facility or portion thereof used in connection with any of the above items. Previously, these items could be deducted if they were associated with the active conduct of the taxpayer’s trade or business, but now the deduction will not be permitted under any circumstances.
Taxpayers will also see a change to meal-related fringe benefits. The 50% deduction for food and beverage expenses associated with operations (business meals during travel, for example) remains, and the Act expands the 50% limitation to any food and beverages provided to employees at an eating facility that meets the criteria of both a de minimis fringe and that is provided for the convenience of the employer. The eating facility expansion is available for all tax periods after December 31, 2017, but will sunset on December 31, 2025.
Family and Medical Leave Credit
Perhaps one of the most substantial tax changes related to employee benefits included in the Act is the creation of a (short term, for now) “family and medical leave credit,” which will appear in IRC § 45S. This credit will allow eligible employers to claim a general business credit (under the terms and conditions of IRC § 38) of 12.5% of any wages paid to qualifying employees when those employees are on family or medical leave, so long as the payment is made under a qualifying policy that pays at least 50% of the normal wages paid to such employee. That credit can increase by .25% (capped at 25%) for every 1% above the 50% provided in wages. The credit is also capped at 12 weeks’ worth of leave per employee.
To qualify, an employer must have a written policy in place that allows all eligible employees at least two weeks of annual paid family and medical leave, and that allows all less-than-full-time eligible employees a similar benefit on a pro-rata basis. Qualifying employees are any employee who (1) meets the definition found in the Fair Labor Standards Act (FLSA), Section 3(e), (2) has been employed with that employer for at least one year, and (3) was not paid more than 60% of the compensation threshold for highly compensated employees.
Note that the leave must meet the requirements for “family and medical leave” found in the Family and Medical Leave Act (FMLA) Sections 102(a)(1)(a)-(e) or 102(a)(3). Any employer-provided leave that is categorized as vacation, personal, or other medical or sick leave will not qualify towards this credit. Also, any benefits/leave time that are required under state or local law must be excluded from the credit; only benefits above what is required by law may be applied.
This credit will be a large windfall for employers with qualifying leave plans already in place, but it will also be a good opportunity for employers who may not meet the requirements for the credit to review their leave policies and determine what changes could be made to qualify, and whether those changes will be beneficial to their enterprise. But act quickly—like most provisions of the Act, the credit has a sunset clause attached, and will only be available for wages paid in 2018 and 2019.
The Act also provided some new procedures for equity compensation. Under the Act, a qualified employee can now elect to defer (for income tax purposes) the inclusion of income attributable to qualified stock transferred to the employee by the employer. The election must be made within 30 days after (1) vesting or (2) the employee’s rights to the stock are transferable, whichever is earlier. The deferral is made in a manner similar to an election under IRC § 83(b) but, unlike § 83(b), restricted stock units (RSUs) are eligible for this deferral. This new deferral procedure includes limitations on the employees and types of stock transactions that qualify, when the income must subsequently be recognized, and also requires technical adherence to strict notice, withholding, and reporting requirements. Failing to comply with the notice requirements, for example, can carry a penalty of $100 for each failure to a maximum of $50,000, so you should work with your stock plan administrators and payroll tax professionals to establish procedures for properly implementing this new deferral mechanism.
Other 2018 Updates
Although not part of the Act, here are some additional 2018 updates for consideration:
- The standard mileage rate for 2018 is 54.5 cents per mile, effective for all travel as of January 1, 2018. For more information on this and other transportation/automobile related valuations for 2018, refer to IRS Notice 2018-03.
- The deadline to furnish 2017 Forms 1095-B and 1095-C to individuals has been extended to March 2, 2018 (the original deadline was January 31, 2018). There is no extension for submitting 2017 Forms 1094-B, 1095-B, 1094-C, and 1095-C to the IRS, however. That deadline remains on February 28, 2018 (if not filing electronically) or April 2, 2018 (if filing electronically). For additional information regarding this extension, refer to IRS Notice 2018-06.
- Remember that the Federal Unemployment Tax Act (FUTA) credit reduction tables will not be determined and released until November. Only California and the Virgin Islands had a credit reduction in 2017.
For more information on the tax reform and how any payroll impacts may affect you, register for our webinar on February 1, 2018.
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