U.S. Tax Reform Bill Includes Numerous Payroll Changes

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By Anna Massoglia

Employers and employees no longer would be able to claim some deductions and income tax rates would range from 10 percent to 37 percent across seven brackets for individuals, a draft bill reconciling the House and Senate tax bills in a conference report released Dec. 17 said.

The reconciliation bill’s seven tax brackets have rates of 10, 12, 22, 24, 32, 35, and 37 percent, compared with the U.S. federal tax brackets currently in effect with rates of 10, 15, 25, 28, 33, 35, and 39.6 percent.

Effective for 2018, U.S. federal individual income tax rates and brackets for single filers under the budget would be:

  •  10 percent for annual income up to $9,525, compared with the current rate of 10 percent for annual income up to $9,325;
  •  12 percent for annual income more than $9,525 up to $38,700, compared with the current rate of 15 percent for annual income of $9,325 up to $37,950;
  •  22 percent for annual income more than $38,700 up to $82,500, compared with the current rate of 25 percent for annual income of $37,950 up to $91,900;
  •  24 percent for annual income more than $82,500 up to $157,500, compared with the current rate of 28 percent for annual income of $91,900 up to $191,650;
  •  32 percent for annual income more than $157,500 up to $200,000, compared with the current rate of 33 percent for annual income of $191,650 up to $416,700;
  •  35 percent for annual income more than $200,000 up to $500,000, compared with the current rate of 35 percent for annual income of $416,700 up to $418,400; and
  •  37 percent for annual income more than $500,000, compared with the current rate of 39.6 percent for annual income more than $418,400.

The income ranges for payroll withholding that are currently in effect slightly differ from the aforementioned ranges and are available in Publication 15 (Circular E).

The U.S. federal income tax rates and brackets in the bill would take effect Jan. 1, 2018. The new individual rates and brackets would be set to expire at the end of 2025, unless the U.S. Congress chooses to extend them.

The U.S. Treasury Secretary would have authority to implement the new income tax rates and brackets for wage withholding purposes later in 2018.

The Internal Revenue Service plans to issue guidance on income tax withholding in January, if the bill is signed into law. President Trump has said he would sign the legislation after passage by Congress. Taxpayers could see the benefits of the change as early as February, the IRS said in a statement released Dec. 13.

Supplemental Wage Rate Changes

The supplemental wage withholding rate, which applies to nonregular “supplemental” wages paid by an employer such as bonuses and commissions also are to change under the bill.

The supplemental wage withholding rate for supplemental wages less than or equal to $1 million, using the flat withholding method, would increase to 28 percent under the bill. The rate is an increase from the current supplemental wage withholding flat rate of 25 percent, in effect since 2007.

Supplemental wage payments in excess of $1 million during the 2018 taxable year would be subject to a reduced rate of 37 percent under the bill, compared to the current rate of 39.6 percent.

Removed Deductions

Effective from the 2018 taxable year through 2025, employee moving expenses paid or incurred in connection with the commencement of work in the private sector would be suspended. The suspension of the deduction for moving expenses would not apply to taxable years beginning after December 31, 2025, unless the U.S. Congress chooses to extend the suspension.

Corporate tax deductions would not be available for certain meal and entertainment costs, subsidized qualified transportation fringe benefits, and certain other employee-related costs.

International Payroll Tax Aspects

U.S. citizens and residents would continue to be subject to individual income tax on their worldwide income under the bill.

Earnings of noncitizens who are lawfully admitted as permanent residents of the U.S. and noncitizens who meet a substantial presence test and are not otherwise exempt from U.S. taxation would also remain taxable as U.S. residents for individual income tax purposes, the bill said.

The source of income for U.S. federal tax purposes of personal services remuneration would generally continue to be the place-of performance.

Withholding agents that make payments of U.S.-source amounts to foreign workers would continue to be required to report and pay any amounts of U.S. tax withheld, the bill said. Withholding agents also would continue to be required to file a summary of the total U.S.-source income paid and withholding tax withheld on foreign employees for the year as well as a report to both the IRS and the foreign employee of that person’s U.S.-source income that is subject to reporting.

Although the foreign tax credit currently applicable to corporate tax relief for intangible income would considerably change under the bill, U.S. citizens and resident aliens would continue to be allowed take a tax credit against their U.S. taxes on foreign income in the amount of the foreign taxes actually paid to the foreign country on foreign-source individual income.

The bill would go into effect once passed by the House and Senate and then signed by President Trump.

To contact the reporter on this story: Anna Massoglia in Washington at To contact the reporter on this story: Anna Massoglia at amassoglia@bloombergtax.com

To contact the editor on this story: Michael Baer at mbaer@bloombergtax.com

For More Information

The conference report containing text of the Tax Cuts and Jobs Act is available from the U.S. House of Representatives.

The statement on withholding rate guidance released Dec. 13 is available from the IRS.

Additional analysis of key payroll provisions in the tax plan is available in Bloomberg Tax’s Roadmap to Key Payroll Provisions of the House and Senate Tax Reform Plans.

Publication 15 (Circular E) is available from the IRS.

More information regarding payroll issues in the United States is available in Bloomberg Tax’s United States payroll primer.

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