A problem arising from the lateness in 2017 of enacting the Tax Cuts and Jobs Act on December 22nd is the inability of the Internal Revenue Service (IRS) to address certain key administrative matters timely. One of the most significant of these administrative matters has been the revision of the income tax withholding tables that are generally used to determine the amount of federal income tax that must be withheld from an employee’s paycheck.
That administrative matter is now resolved. The Treasury Department, on Thursday, January 11, 2018, released the 2018 income tax withholding tables for the new tax law, Notice 1036.
The tables lay out how much tax to withhold or not withhold from paychecks. With these new guidelines, companies can start adjusting employee paychecks. This is especially important as many employees are paid semi-monthly with an upcoming pay for their first pay period in 2018 on Monday, January 15th.
Employers are instructed to use the 2018 withholding tables as soon as possible, but not later than February 15, 2018. Until employers make the switch, they’re instructed to use the 2017 withholding tables.
The Secretary of the Treasury noted that he expects about 90 percent of workers to see their paychecks increase.
The Treasury also said that employers should withhold taxes at a 22 percent rate from the special bonuses distributed following the passage of tax overhaul. That rate is lower than the amount that had been previously withheld.
The backup withholding rate is 24 percent. Generally, under the backup withholding rules, employers must withhold 24% of certain taxable payments if the payee fails to furnish you with his or her correct taxpayer identification number (TIN).
The new withholding tables are designed to work with the forms W-4 that employees already have on file with their employers. As such, taxpayers may not have to do anything else at this point in time. However, according to the IRS, the new tables should result in the correct amount of tax withholding: It is possible, though, that with the new tables, certain taxpayers may need to change form W-4.
The IRS is revising the current form W-4, though a release date is not yet available. For other payroll related items, read our latest tax alert.