Republican lawmakers hoped that public opinion on their tax bill would turn around once the law took effect on January 1.
“In January the American people are going to see,” Sen. Ted Cruz (R-TX) said on the Senate floor in December in support of the Republican tax plan. “So I am going to encourage the American people, in January, take a look at your pay stubs.”
But in January, the tax cuts won’t show up in pay stubs at all. Taxpayers (and Republican supporters of the plan) will have to wait at least a few more weeks while the IRS scrambles to figure out the details.
About three-quarters of American households will get some kind of tax cut in the short term. That should translate into paychecks that are at least a few dollars bigger — once employers and payroll administrators get word from the IRS on how to translate the bill into their employees’ tax withholdings.
The IRS said in late December that it is “working to develop withholding guidance” to implement the tax reform legislation and anticipates the initial withholding guidance to be out sometime in January. After that, it should take companies about four to six weeks to implement the changes.
The IRS normally issues its tax tables in December, but with the tax bill looming in late 2017 — and the constant, up-to-the-last-minute changes to the legislation — it held off. The bill also left out some specifics about what, exactly, the IRS should do to accommodate the changes. The agency has since had to scramble to reconstruct the tables, and they’re still not out.
“The IRS realizes that not all payroll systems can be turned on a dime,” said John Myett, director of government affairs at ADP, the largest payroll firm in the United States.
That means that barring any surprises, many people should expect to see the new tax rates reflected in their paychecks in February or, in some cases, March — but there are no guarantees. (An IRS spokesperson declined to comment on the timing of the tables beyond what the agency has already said publicly.)
“Some companies might not be so nimble,” said Bill Dunn, director of government relations at the American Payroll Association, which represents about 21,000 payroll administrators at around 17,000 employers across the US. “It could take longer if the change is more complicated than we think it’s going to be.”
What the tax law does
The Republican tax plan offers temporary tax cuts for individuals, though the number of tax brackets remains the same. It increases the standard deduction and child tax credit and eliminates the personal exemption, the theory being that it will be made up for with the child tax credit, increased standard deduction, and lower rates across the board.
The bill limits the state and local tax deduction, the burden for which will largely fall on rich blue-state residents, and could have other complicating effects at the state and local level. The legislation, broadly, is most beneficial to corporations and the wealthy, while potentially hurting the poor and increasing the deficit.
If you get a tax cut at all, and if it’s big enough to notice, depends on how much you make, where you live, and how you file your taxes. A single person with no children making $30,000 per year would get a $457 tax cut, according to the Tax Policy Center — about $17 per paycheck if they’re paid biweekly.
Changes in federal withholdings won’t impact payroll taxes such as Social Security and Medicare, which will remain the same. And in terms of states, it really depends on each one.
“Many states follow the federal guidance, so we’ll see many states also making adjustments,” Myett said. “They may be eliminating exemptions as well and doing very similar things, because by state statute, many states actually follow the internal revenue code.”
After the tax bill passed, some news coverage suggested that employees would have to fill out new W-4 forms, the tax forms employers use to calculate how much to withhold from paychecks for federal income tax. (Most people fill out these forms when they get a new job, or if they need to adjust their withholding because their tax situation changed — if they get married, for example.) That’s because the personal exemption is heavily linked to how withholding calculations are made.
Myett said that while current W-4 forms may work for now, eventually he expects them to be replaced entirely — possibly being phased in this year and in full effect by 2019. That will take time for the IRS to formulate and employers to implement. For big employers with hundreds or thousands of employees, collecting and inputting new W-4 paperwork could be a long process, depending on how different the new IRS tables actually are.
But it’s also a good idea for most people to give their W-4s a look anyway, to try to get their withholdings as close as possible to what their actual tax liability will be.
If too much is withheld, you’ll get that money back at tax time in April 2019. And the IRS’s tables may account for the delay. “That would be the ideal thing, because certainly in payroll, retroactivity is a four-letter word. We don’t want to look backward; we just want to look forward on this,” Dunn said.
Freelancers, call your accountant
It’s not just payroll employees who are affected by the tax bill — freelancers and contractors are as well. And on that front, it’s a good idea to think ahead.
Many freelancers pay quarterly estimated taxes throughout the year in order to avoid paying all they owe in one chunk (and the IRS penalty that often comes along with paying the entire tax bill at once during tax season). If you’re a freelancer or contractor meeting with your tax accountant to square away your 2017 taxes this spring, it’s a good time to also talk about how to account for the 2018 tax bill.
“They usually make the first-quarter payment about the time that they go meet with their CPA about their taxes, and that’s a good time to determine what your estimated taxes are going to be for the year,” said Melissa Labant, director of tax policy for the American Institute of CPAs, whose membership includes more than 400,000 accounting professionals worldwide. “It’s the same concept, except that you’re withholding the taxes yourself.”
She said the same holds for small-business owners — it’s a good idea to speak to an accountant sooner rather than later about how the new tax bill changes things.
It’s also important to note that while the Republican tax bill generally lowers tax rates for most people, that’s not true for everyone.
“Rates themselves have gone down. It doesn’t necessarily mean that your taxes have gone down, depending on your personal situation and the types of deductions and credits that you have,” Labant said. “You don’t want any surprises when it comes to taxes.”