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How the Tax Cuts and Jobs Act Impacts Employers
Congress has started its push for tax reform with bills introduced from both the House and Senate (both called the Tax Cuts and Jobs Act). But what types of changes are proposed and how do these changes affect employers? Let’s take a look at what has happened so far and break down both bills.
11/2: Tax Cuts and Jobs Act Released
The U.S. House Ways and Means Committee introduces its tax code reformation bill that includes several huge changes to individual and business taxes, including a reduction in the number of tax brackets, elimination of personal exemptions, and changes to several individual and business tax credits.
11/9: House Bill Approved
The U.S. Ways and Means Committee approves the House bill, so it advances to the House floor for a vote. The Senate releases their version of the bill.
11/16: House Passes Tax Proposal
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Differences of Opinion: House Bill Vs. Senate Bill
Although the House and Senate bills share a name, there are several key differences between the two tax proposals. Neither bill has any payroll-related provisions that would affect the 2017 tax year. Once the Senate plan is voted on, a committee will more than likely have to reconcile the differences between the two bills.
House Proposed Bill
Personal exemptions would be eliminated starting in 2018 in favor of a higher standard deduction of $12,000 for single taxpayers and $24,000 for married couples filing jointly. The standard deduction for 2017 is $6,350 and $12,700, respectively.
Tax exclusions for employee achievement awards, adoption-assistance programs, and otherwise qualified moving expenses would be repealed.
The work opportunity tax credit would be repealed.
The Federal Insurance Contributions Act employer credit on tipped employee income would be modified.
The deductibility of entertainment expenses would be reduced.
Employer options would be limited in deducting executive pay that exceeds $1 million a year.
The exclusion for dependent-care assistance programs would end after December 31, 2022.
Federal income tax brackets would be 12, 25, and 35 percent and the 39.6 percent rate for individuals earning more than $1 million would be retained.
Senate Proposed Bill
The top tax rate would drop to 38.5 percent from 39.6 percent and would apply the top rate to income starting at $500,000 for single filers.
The other tax brackets are 10, 12, 22, 24, 32, and 35. The standard deduction for taxpayers would also increase.
A 5 percent withholding requirement would be created for payments up to $20,0000 to those under contract providing services to service recipients.
Computer or peripheral equipment would be removed from the definition of listed property and modify the definition of luxury vehicles used for cents-per-mile personal use valuation.
A single aggregate limit on contributions to Section 457(b) plans and elective deferrals for employees under a Section 401(k) plan or Section 403(b) plan of the same employers would apply.
How This Affects Employers
These proposed tax code changes would result in a significant overhaul of the federal 2018 Form W-4 and to employer payroll systems regarding employee withholding allowances. Currently, taxpayers can claim personal exemptions for themselves, their spouse, and their dependents.
If the bill passes, your payroll system may need to be updated to no longer take withholding allowance amounts into account. Your employees may also need to update their Forms W-4 depending on the changes made to the form.
Stay tuned to the APS blog for updates on the Tax Cuts and Job Acts bill as they become available.
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