Payroll and Compensation Implications of Tax Reform

| 1/11/2018

The Tax Cuts and Jobs Act contains several provisions affecting payroll and fringe benefits. Following is a summary of the major provisions that affect payroll and benefits in 2018.

  • The IRS released Notice 1036 on Jan. 11, 2018, which updates the income tax withholding tables for 2018 and reflects changes made by the tax reform legislation enacted by the TCJA. The IRS stressed that the new guidance and tables should coincide with current Forms W-4, “Employee’s Withholding Allowance Certificate,” in place, and minimal action by employees will be needed. However, employers should anticipate an increase in Forms W-4 filed by existing employees who might want to change their withholdings.
  • Although the tax reform initially appeared to increase the optional flat withholding tax rate to 28 percent from 25 percent for those receiving up to $1 million in supplemental wage payments in 2018, Notice 1036 establishes the optional withholding tax rate to be 22 percent.
  • The withholding rate for supplemental wage payments in 2018 changes to 37 percent from 39.6 percent for income in excess of $1 million.
  • Tax-free employer reimbursements of up to $20 a month from 2018 to 2025 paid to employees commuting to work by bicycle are now taxable wages. Employers will need to include these amounts in employees’ wages and begin withholding.
  • Employer reimbursements of employees’ moving expenses are now taxable and included in Form W-2, “Wage and Tax Statement,” wages. Businesses will need to evaluate their employee relocation compensation policies in light of the change.
  • Employer-provided transportation benefits such as qualified parking, bus and train cards, and van pools continue to be tax-free to employees. However, businesses no longer may deduct these expenses. 

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Howard Wagner
Partner, Washington National Tax