Employers now have initial information to proceed with 2018 withholdings. While this information will get you started on 2018 withholdings, final information will not be available until sometime in February.
On January 11, the IRS released Notice 1036, which is an early copy of its percentage method tables for 2018 income tax withholding. The IRS also published Frequently Asked Questions to provide employers with additional information on withholding this year and next. Withholding tables are designed to streamline the process for employers to take out the correct amount of income tax from an employee’s paycheck, as dictated by the Form W-4 on file. There is no action required by employees at this time.
Tax Reform Impact on Withholding
Typically issued before the calendar year end, 2018 withholding information was delayed by the enactment of the Tax Cuts and Jobs Act on December 22, 2017. The withholding information in Notice 1036 is typically included alongside additional information like wage-bracket tables in Publication 15, (Circular E), Employer’s Tax Guide. The IRS is expected to release Publication 15 sometime in February.
Timing and Deadline for New Rate Use
In the meantime, the updated withholding tables show the rates employers should use in 2018. The IRS recommends that employers begin using the 2018 tables as soon as possible, but by February 15, 2018 at the very latest. Until the 2018 tables are implemented into their payroll processing systems ahead of the February 15 deadline, employers may continue to use the 2017 withholding rates.
Supplemental wage and backup withholding for 2018
The Tax Cut and Jobs Act also changes the rates to be used for supplemental or nonregular wages, like bonuses or commissions, and backup withholding for tax years 2018 through 2025.
During this period, the backup withholding rate drops from 28 percent to 24 percent.
The law keeps the two tiers for supplemental withholding:
- For supplemental wages over $1 million, a mandatory flat rate of 37% applies (down from 39.6% in 2017).
- For supplemental wages up to and including $1 million, the following options are available:
- Withhold a flat 22% (down from 25% in 2017), no other percentage is allowed
- Combine with regular wages and apply to the withholding tables
Revisions to Withholding Calculator and W-4s Underway
In addition to the new withholding tables, the IRS is also updating other resources and tools used by business owners and payroll processors.
The IRS expects to release an updated withholding tax calculator before the end of February. A revision of Form W-4 is also in the works, and can be used in tandem with the updated calculator by employees starting a new job or existing employees seeking to adjust their withholding in the wake of tax reform or other personal changes in 2018 and beyond. Until the new Form W-4 is issued, however, employers and employees should continue to use the 2017 version.
RKL’s team of professionals dedicated to serving the needs of small business owners is available to answer questions about the federal withholding information and changes in 2018. Contact your RKL advisor or one of our local offices to get started.
Contributed by Tina Dodson, CPP, EA, in RKL’s Small Business Services Group. Tina has two decades of experience helping small business owners and their management teams meet their financial reporting and individual and corporate tax return preparation needs.