W-4 and Payroll Tax Changes

The 2017 Tax Cuts and Jobs Act, which was signed in December of 2017, applies to the 2018 tax year. These changes include tax bracket adjustments, the elimination of individual health insurance mandates, increases to supplemental tax rates, and paid family leave incentives.

As a business owner and employer, you’re responsible for paying federal unemployment tax (6%, capped at $7,000), state unemployment tax from your payroll, while your employees are individually responsible for federal, state and local income taxes. Employees and employers are each responsible for 6.2% for Social Security (capped at $132,800) and 1.45% for Medicare (with no cap). Keep in mind that for those businesses that use a PEO the payroll tax liability is shifted away from the business to the PEO. Having the business file its payroll taxes under the PEO’s FEIN number provides the business owner with peace of mind, because the PEO is responsible for ensuring payroll taxes are accurate and paid on time.

Each employee’s W-4 form will indicate what allowances might affect the withholdings for each income bracket.

As you jump into the most hectic part of tax season, consult with your PEO to make sure that your payroll withholdings have been consistent with these 2018 brackets, and to make sure your company is taking advantage of each adjustment to the tax code. For comprehensive information regarding the current tax standings, visit irs.gov/tax-reform.

Fortunately, the changes associated with the Tax Cuts and Jobs are not yet as drastic as they might have been.

For the last six months of 2018, business owners, HR professionals and everyday employees alike worried that there would be drastic changes to W-4 forms come the 2019 tax season. Namely, the IRS in June 2018 released a W-4 draft that scrapped the decades-old allowance system in favor of a much more cumbersome process that would have required individuals to indicate exactly how much they wanted withheld from their paychecks annually. Rather than simply claiming allowances—namely dependents like children—individuals would have had to calculate their own withholdings. This new form would have added a massive administrative burden to individuals and payroll professionals alike.

Additionally, because there was no mandate for employees to fill out the new form, companies most likely would have had to calculate their payroll taxes under two different systems—the old and the new.

Fortunately, when the new W-4 was finally released in mid-December, there were no sweeping changes. In fact, the 2019 W-4 is virtually identical to its previous iteration.

That being said, the IRS has again promised sweeping changes to the W-4, to come in 2020. For those business owners using a PEO they can have peace of mind knowing that the PEO will keep their payroll accurate and in compliance with the ongoing changes to Federal and State payroll rules and regulations.

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