Opinion: Withholding in 2018

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The withholding of payroll tax from paychecks and what everyone’s take-home pay will be is unclear.

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 1, 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 1 when the new law takes effect.

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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.

All of 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 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 percent might be going up to 28 percent.

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, but 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 paychecks 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.

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