IRS Issues New Withholding Guidelines for Payroll Taxes

The Internal Revenue Service (IRS) has issued the new (percentage method) payroll withholding tables for 2018 along with notification that the W-4 Form is in the process of being updated to reflect the new tax law. For the moment, no new form is required and employers should retain the existing forms for all employees. In addition to recalculating the new payroll tax deduction, there are a several other changes for employers to consider.

Key points from the IRS Notice 1036 Early Release Copies of the 2018 Percentage Method Tables for Income Tax Withholding:

• The initial withholding allowance amounts have changed for 2018 for payroll tax deductions ranging from a low of $79.80 to an annual figure of $4,150.00. When using the percentage method to determine the amount of payroll taxes to deduct, this amount is deducted from the gross wages to result in the base amount of wages. This base amount is the figure to be used for the percentage calculation.

• Each employee’s wages must be calculated at a rate determined by the marital status and the term of the pay period, all of which are outlined in the tables.

• Note that the income tax withholding for Nonresident aliens, which the exception of students and business apprentices from India, are to be determined based on a different calculation. Be certain that the classification of employees is accurate before calculating payroll taxes to be withheld.

• The social security tax rate remained unchanged from 2017 at 6.2% for each the employee and the employer. The social security wage base limit is $128,400.

• While the Medicare tax rate remained constant from 2017 at 1.45% for both employee and employer, there is a requirement for employers receiving wages in excess of $200,000.00. Employers will be required to withhold an additional 0.9% beginning in the pay period the employee’s wages reach the $200,000.00 threshold.

• Rules regarding payroll tax withholding for supplemental wages are based on a series of criteria dependent on how the supplemental wages are paid and how regular wages are taxed. It is best for employers to understand the requirements and then make a determination on how to treat all supplemental wages for all employees. There are different rates for supplemental wages above and below the $1 million level.

• If an employee fails to furnish you with his or her correct taxpayer identification number (TIN) the guideline says to “generally” withhold 24% of certain taxable payments. This is called “Backup withholding.” Information, including types of payment subject to backup withholding is included in IRS Pub. 15, Nonpayroll Income Tax Withholding.

Please note that the Notice 1036 is a portion of the payroll tax information contained in Publication 15, Employer’s Tax Guide (For use in 2018.). As always, new updates will be issued as the IRS continues to unfold the new tax law.

While Notice 1036 offers no such suggestion, tax and accounting professionals are encouraging employees to pay close attention to the amount of taxes being withheld and their particular situation. Many of the previously allowed deductions will no longer be applicable on the 2018 tax return and may have a significant impact on the tax liability for individuals and families. Most experts suggest people talk with a tax professional to gain insight on their particular tax status early in the year to prevent surprises when the returns are due in April, 2019.

Likewise, employers have a lot of calculations and regulations to adjust their payrolls in accordance with the new law, too. The new tax law is complex and contains many changes that will impact employees as well as employers as the year unfolds. It’s a lot for busy small business owners to wade through and think about and, besides that, it was all supposed to be done in less than 30 days by February 15, 2018.

Being sure you, as an employer, have made all the right decisions and calculations can be a burden and that’s why The Payroll Department exists. We make sure that the calculations and tax rule compliance is completed accurately and on time for you. Many of our clients have told us they are so glad we remove that weight off their shoulders with the payroll and tax services we provide.

As payroll, labor, and payroll taxes become more and more complex, you have the option to leave the details to the experts at The Payroll Department. Teresa Ray and her team have been in the payroll business for more than two decades and they are ready to serve you and your business. Call Teresa at 317-852-2568 today to find out how quick and easy it can be to set up payroll services – and alleviate the stress of payroll regulations and laws from your days and nights, too.

-Elaine of The Payroll Department Blog Team

This information is provided as a courtesy, may change and is not intended as legal or tax guidance. Employers with questions or concerns outside the scope of a Payroll Service Provider are encouraged to seek the advice of a qualified CPA, Tax Attorney or Advisor.