The Tax Cuts and Jobs Act (the Act) was passed by both the House and Senate on December 20, 2017, and was signed into law on December 22. The intent of the Act was to reduce taxes for individuals and corporations, but it also revamped parts of the tax code.
These changes were effective on January 1, 2018, which means business owners need to understand the details of the tax reform and react quickly. Here are some things to be aware of as you learn more about this complicated piece of legislation.
How Will the Bill Impact Business Owners?
- Form W-4 Impact: Many of your employees could see a tax cut because of the tax reform law. Does that mean you need to refile a new W-4 for each employee?
While this still could potentially mean a headache for managing payroll, since employees will now have different tax withholding on their paychecks to adjust for the new tax rates, the IRS is working to minimize the disruption. It has designed new withholding guidelines that will let employers follow the updated tax rates without needing a new W-4 from each employee.
Employers should begin using the 2018 withholding tables as soon as possible, but no later than February 15, 2018. The IRS maintains that the new withholding tables are designed to work with the Form W-4 that workers have already filed with their employers.
- ACA Individual Mandate: One of the other major changes is that the Act effectively eliminated the Affordable Care Act individual mandate, which required every person to have health insurance, get a waiver or be subject to a penalty. The penalty is now zero. That said, the tax reform bill did not eliminate the employer mandate. So, if you were required to offer health insurance before the Act, you still need to do so.
Bottom line: The IRS is striving to minimize the steps employers will need to make to accommodate the tax withholding provisions of the Act. Business owners should update their payroll system to reflect the new withholding tables.
How Should You Handle Employee Questions?
- New Form W-4 Not Needed - Yet: The IRS has issued guidance that allows the employer to adjust an employee's withholding based on their current Form W-4. Until a new one is issued, employees and employers should continue to use the current Form W-4 on file. Employers should be prepared to accept updated Forms W-4 from employees, but may wish to advise employees that, based in IRS statements, a revised IRS withholding calculator and Form W-4 will be available later in 2018.
- Estimate Paycheck Impact: If any employees want to calculate how much change they will see, they can use a free online calculator to estimate the results. The IRS predicts that employees will see the change in their paychecks potentially as early as February. It should be noted that only 75 percent of filers should expect to see a cut. Some employees may see no change or a tax increase.
Bottom line: Employees should know that any adjustments as a result of the Act to their taxes will show up automatically in their paycheck starting as early as February, if the employer updates their payroll system accordingly.
What Should You Ask Your CPA or Business Advisor?
Your CPA or business advisor is aware of the upcoming payroll changes and is ready to help you react. This should be a quick adjustment. From there, you and your tax advisor should focus on the long-term effects of details relating to the Act.
- Questions to ask might include:
- How much will you and your business save in taxes starting in 2018?
- What are some ways to invest that money back into your company and workforce?
- Will you be hurt by the loss of any tax deductions, like the elimination of the deduction for entertainment expenses? Have this conversation now so you can adjust your business strategy if necessary.
Bottom line: You and your advisor should be focused on the long-term impact of tax reform.
It will be a busy few months as business owners react to the tax reform bill, and as new guidance is released, but the adjustment should be manageable with help from trusted advisors and reliable resources. From there, business owners can focus on long-term planning.
For more information, join or replay ADP's February 18, 2018, tax reform webcast, "Tax Reform Is Here...Understanding the Impact, Part 1."
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