H.R. 1, the Tax Cuts and Jobs Act (the Act), was passed by both the House and Senate on December 20, 2017, and signed into law by President Trump on December 22, 2017. The Act includes several significant changes that are relevant to employers for payroll, employment tax and employee benefits purposes.
Please review the attached Eye on Washington for further details and a brief summary below of some of the more notable provisions. As always please contact your Human Resources Business Partner or your Payroll Service Representative if you have any questions.
Income and Employment Taxes
The Act changed the federal income tax tables and rates effective January 1, 2018. The Internal Revenue Service issued a statement on December 26, 2017 indicating that it is working to develop withholding guidance to implement the changes included in the Act. The IRS anticipates issuing guidance in January and encourages employers and payroll service providers to implement the changes in February.
The IRS has further indicated that this guidance will be designed to work with the existing Forms W-4 that employees have already filed, so no further action by employees is needed at this time. Use of the new 2018 withholding guidelines will allow taxpayers to begin seeing the changes in their paychecks as early as February. In the meantime, ADP will continue using the existing 2017 withholding tables and systems.
The mandatory withholding rate on supplemental wages exceeding $1 million is tied to the highest income tax rate. For 2017, the rate was 39.6%. The Act lowers that rate to 37% for tax years 2018 through 2025. The tax rate on supplemental wages of up to $1 million is tied to a section of the Internal Revenue Code that is suspended for tax years 2018 through 2025. As a result, it is unclear what withholding rate will apply for these 2018 supplemental wages. It appears that the withholding rate may increase to 28% (from 25%), but that has not yet been confirmed by the IRS. We will continue to monitor any guidance that is issued by the IRS and will update our systems accordingly.
Qualified Transportation Fringe Benefits
The Act repealed the employer deduction that was previously permitted for expenses related to qualified transportation fringe benefits. Effective for tax years beginning after December 31, 2017, employers are no longer permitted to deduct any expenses related to the offering of qualified parking, commuter highway vehicle transportation and transit passes. The Act does not, however, impact the tax treatment of qualified transportation fringe benefits to employees under Section 132(f) of the Internal Revenue Code. Pursuant to Section 132(f) of the Code, the maximum monthly exclusion for qualified transportation fringe benefits is $255 per month. These benefits will remain tax exempt to employees and such benefits can continue to be offered to employees on a pre-tax basis through a qualified transportation fringe benefit plan, including the TotalSource Commuter Benefits Plan.
Affordable Care Act
The Act effectively eliminates the individual mandate by reducing the penalty for not purchasing insurance to zero for tax years beginning after December 31, 2018. It should be noted that the Act does not change the employer shared responsibility mandate. As a result, applicable large employers (ALEs) must still offer coverage that is affordable and provides at least minimum value to their full-time employees or potentially pay a penalty.
The obligation to file Forms 1094-C and 1095-C annually also essentially remains unchanged, although the IRS did announce on December 22, 2017 that it has extended the 2018 due date for furnishing 2017 health coverage information forms to employees. ALEs now have until March 2, 2018 to provide Forms 1095-C to individuals, which is a 30-day extension from the original due date of January 31, 2018. No extension was provided for filing the forms with the IRS.
New Tax Credit for Paid Family and Medical Leave
For taxable years beginning after January 1, 2018, eligible employers may claim a general business credit equal to 12.5% of wages paid to qualifying employees during any period in which such employees are on paid family and medical leave, if the rate of payment under the program is at least 50% of the wages normally paid to an employee. The credit is increased by 0.25 percentage points (but not above 25%) for each percentage point by which the rate of payment exceeds 50%.
An eligible employer is one who has in place a written policy that allows all qualifying full-time employees not less than two weeks of annual paid family and medical leave, and who allows all less-than-full-time qualifying employees a commensurate amount of leave on a pro rata basis. There are many details to be determined through regulations, which are likely to take several months to complete. If you have established a paid leave policy and wish to take advantage of the new tax credit, we recommend that you consult with your legal and tax advisors. This tax credit will not apply to wages paid in taxable years beginning after 2019 unless extended by Congress.