House, Senate Tax Plans to Affect Payroll in 2018; IRS Plans Transition

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By Keith Hill and Jazlyn Williams

Work on a federal tax bill has meant that release of the 2018 withholding tables and other documents have been suspended until the pending tax legislation is resolved, according to an Internal Revenue Service official.

Differences in the House and Senate versions of the legislation are to be reconciled by a conference committee. Nine House members plan to begin work with eight senators Dec. 13 on a compromise bill that would be sent to both houses for passage and then to the president for his signature.

The House and Senate differ significantly in establishing the tax brackets and in disposing of certain employer-provided benefits that could be taxed.

Transition Period: Employers Would Continue to Use 2017 Tables

The Internal Revenue Service is delaying release of the 2018 percentage-method withholding tables and Forms W-4, Employee’s Withholding Allowance Certificate, said Scott Mezistrano, IRS representative for industry stakeholder engagement and outreach.

Speaking Dec. 7 during a teleconference with payroll industry representatives, Mezistrano said that after any finalized bill is signed into law, there would be a transition period in which the IRS would assess the effects of the measure, modify its processes, and release guidance to the employer community.

In a transition period, employers would continue using the 2017 withholding tables up to a deadline that would be specified by the IRS, he said.

“Once any law does pass, we will then need to analyze the changes, work them into our systems, our products, our processes,” Mezistrano said.

A transition period could be good or bad for employers depending on when and how the tax changes are implemented, Fred A. Basehore, Jr., CPP, Senior Manager for KPMG, told Bloomberg Tax on Dec. 11. Basehore also was concerned about how certain employer deductions for some benefits that would be eliminated could result in additional taxation of employees’ wages.

A transition period could be bad for employers if any changes will need to be applied retroactively, and if employees are not given enough time to adjust their withholding, Martin Armstrong, CPP, DBA, vice president of Payroll Shared Services for Charter Communications Inc., told Bloomberg Tax on Dec. 11.

Both Basehore and Armstrong are Payroll Library Advisory Board members.

Later Release of Withholding Guidance Not New

When legislative action on tax laws expiring at the end of 2012 delayed release of the 2013 withholding tables, employers were told to use the 2012 withholding tables to begin processing paychecks in the new year. When the 2013 withholding tables were released Jan. 3, employers were told to implement them as soon as possible, but no later than Feb. 15.

A late revision to the percentage-method withholding table also occurred in 2009 when the IRS issued new tables that incorporated the Making Work Pay tax credit, a provision that was included in the American Recovery and Reinvestment Act of 2009. After issuing the tables Feb. 21, the agency asked that employers use them as soon as possible, but no later than April 1.

The IRS did not mandate retroactive implementation in either instance.

Changes to Supplemental Wage Rate

The flat percentage-rate withholding that employers apply to supplemental wage payments would change under the House and Senate legislation. Supplemental wages are nonregular wages paid by an employer, such as bonuses and commissions.

The rate currently used to withhold on supplemental wages exceeding $1 million is 39.6 percent, or the highest tax rate in effect. The rate for supplemental wages less than or equal to $1 million, using the flat withholding method, is 25 percent, or the third lowest rate in effect.

The seven federal tax brackets now in effect have rates of 10, 15, 25, 28, 33, 35, and 39.6 percent.

The House version would establish four tax brackets: 12, 25, 35, and 39.6 percent. The withholding rate on supplemental wages exceeding $1 million would remain the same under this bill.

The Senate would have the seven tax brackets at 10, 12, 22, 24, 32, 35, and 38.5 percent. Under this version, the withholding rate on supplemental wages exceeding $1 million would decrease to 38.5 percent.

For the lower, optional flat percentage rate withholding that could be applied to amounts less than or equal to $1 million, it is unclear what the rate on supplemental wages would be until rates are agreed to in a final bill coming out of the conference committee.

Payroll-Related Provisions

The Senate version would define “tangible personal property” as it relates to employee achievement awards to exclude cash, merchandise cards or coupons, meals, or other similar items. The House version would treat all employee achievement awards as taxable compensation.

The House version would repeal the Work Opportunity Tax Credit, but the Senate version does not address the issue.

The House version also would eliminate tax-free employer-provided educational assistance, tax-free employer-provided adoption assistance and, after 2022, tax-free employer-provided dependent care assistance.

Although the House version of the bill would eliminate tax-free moving expenses, the Senate version would suspend their tax-free status until 2026.

The Senate version does not address the other benefits the House seeks to repeal but would eliminate the $20-a-month qualified bicycle transportation fringe benefit and the individual mandate tax under the Affordable Health Care Act.

The House version would disallow employer deductions for entertainment, amusement, or recreation activities. The Senate would disallow employer deductions for expenses associated with meals provided for the employer’s convenience on or near the employer’s business premises through an employer-operated facility that meets certain requirements.

Deductions for subsidizing employee-qualified fringe benefits also would be eliminated under the House version.

A Senate provision that would have repealed the deduction elimination if revenue targets from Oct. 1, 2017, to Sept. 30, 2026, were met was removed from the bill.

The House and Senate provisions generally would apply starting Jan. 1, 2018.

For more information: See Bloomberg Tax’s Roadmap to Key Payroll Provisions of the Tax Cuts and Jobs Act (H.R. 1), available through Payroll Library.

To contact the reporters on this story: Keith Hill in Washington at khill@bloombergtax.com and Jazlyn Williams at jwilliams@bloombergtax.com. To contact the editor on this story: Michael Baer at mbaer@bloombergtax.com.

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