Withholding in the New Year
By Albert B. Kelly
With the approach of the holidays and the New Year, my
inclination would normally be toward quiet reflection and perhaps expressions in-line
with the spirit of the season. I was actually trending in that general
direction and but for a short piece on the front page of the business section
in the Wall Street Journal recently, that’s exactly what I would have done.
But given the changes coming for 2018, changes that will
impact every employee and employer in our communities, I thought it worth
shifting gears from warm holiday sentiments to the cold hard reality of pending
tax code changes. I’m specifically referring to the tax overhaul being passed in
Congress which will likely be signed before the ball drops in Times Square.
According to reporter Laura Saunders, the American Payroll
Association (APA) has been trying to alert Congress to the complete mess they
are about to unleash on many millions of employees and tens of thousands of
companies as it relates to the withholding of payroll tax from paychecks and
what everyone’s take-home pay will be.
If I understood the piece correctly, the first issue is one
of timing. While the new tax bill would be effective January 1st, it
will only become law with a few days left in the year. That means that the IRS
and whoever else is involved with writing the regulations won’t have any time
to complete that process ahead of January 1st when the new law takes
effect.
Why does that matter for the employers and employees in
Bridgeton, across Cumberland County, and throughout New Jersey? It matters
because payroll departments won’t know how much money to withhold from
everyone’s paycheck. And while the new tax bill is likely to take away the
personal exemption and double the standard deduction, we’ll still need new W-4
forms regardless.
All of this this matters a great deal because if too little
is taken out of each paycheck; employees will get whacked with penalties for
underpaying and the major weight of that transgression falls on employees more
than employers.
As it stands right now, the amount taken out of each
employee’s paycheck is tied to the number of allowances listed on the W-4 and
is based on withholding tables provided by the IRS. With the new changes, all
of that goes away and the IRS will need to put out new regulations and new
forms and until they do, no one will know quite how to proceed.
While a many employees earn an hourly wage or a straight
salary, others work in companies that provide bonuses, commissions, or other
lump-sum compensation including stocks. It is not clear what the withholding is
to be on these forms of compensation- though according to article, the current
rate of 25% might be going up to 28%.
While much work remains to be done by the IRS once the new
tax bill becomes law, it is also true that government moves like a glacier.
We’re not talking weeks here, but likely months before the dust settles and
everyone has an idea of what they’re responsible for under the law. As I said
mentioned before, the burden is mostly on the employee for getting things right.
The last time major tax code changes came along, the
legislation was passed early in the year and this meant that the IRS had time
to create the new forms and payroll departments had time to prepare for the
changes and alert employees as to what they should expect, not so this time.
Beyond the math involved with tax tables, there’s the bottom
line for many employees and that bottom line is the dollar amount in their
paycheck’s that lets them know just how much take-home pay they’ll have to live
on until the next one comes.
The new law claims to double the standard deduction in place
of the personal exemption that’s being eliminated; it’s the difference between
having the money in each paycheck as opposed to getting it in a lump sum once a
year. The problem is that many live from paycheck-to-paycheck and these changes
will hurt. Don’t rage at the payroll department, it’s not their fault.
Let’s hope this change, coming as it does at the very end of
the year with no time to transition, doesn’t result in the IRS withholding
refunds or penalizing employees in 2019 for underpayment-especially since the
chaos originates from Washington DC.