Beginning today, Thursday, February 15, employers are required to start complying with new tax withholding tables released recently by the U.S. Department of the Treasury. We should all begin to see changes in our paychecks as soon as late February or early March.
“With this guidance, most American workers will begin to see bigger paychecks. We estimate 90 percent of wage earners will experience an increase in their take home pay,” said U.S. Treasury Secretary Steven T. Mnuchin.
The new guidance, developed jointly by the Office of Tax Policy and the IRS, was designed to work within the constraints of the existing payroll withholding system to deliver the benefits of the tax cuts as soon as possible and with as little disruption as possible. Specifically, the new withholding tables are designed to work with the W-4 forms already filed by employees for 2018 to hopefully minimize the burden on taxpayers and employers.
The new law makes a number of changes for 2018 that affect individual taxpayers. The new withholding tables reflect the increase in the standard deduction, repeal of personal exemptions, and changes in tax rates and brackets.
As the IRS makes clear in their release, the new tables are designed to produce the correct amount of tax withholding. The tables are also aimed at avoiding over- and under-withholding of tax as much as possible.
What Kind of Changes Will You See?
As with most of the tax changes made by the recently passed tax-reform bill, the answer is, “it depends,” advises The Motley Fool. If you’d like to calculate how much you can expect your paycheck to increase, follow these steps:
Locate your most recent pay stub and determine how much was withheld for federal income taxes. Keep this number handy.
Start with your gross (before tax) income. You can find this on your pay stub, or by dividing your annual salary by the number of times you get paid each year.
Subtract the number of allowances you claimed on your W-4 times the appropriate payroll-frequency factor, which you can find on the front page of the new withholding tables. (If you aren’t sure how many allowances you claimed, your payroll department should be able to tell you.) This is the amount of wages you’ll use to determine your new withholding amount.
Use this number with the table that corresponds to your filing status and payroll frequency in the new withholding tables to calculate your new per-paycheck withholding amount.
Subtract this number from your current per-paycheck withholding, which you determined in step one. This number is how much your paycheck could increase.
Let’s Look at the Numbers
The Motley Fool sets up this scenario: Say you’re a single taxpayer and you earn $50,000 per year, paid bi-weekly. For each pay period, you earn $1,923.08 before any taxes are withheld. When you filled out your employment paperwork, you claimed two allowances.
For each withholding in 2017, a bi-weekly paid employee’s wages are reduced by $155.80. This reduces the $1,923.08 figure to $1,611.48, which is the number used to determine your withholding. Using 2017 withholding tables, $264.53 should have been withheld from each paycheck for federal income taxes. (Note: If you’re calculating your own, you can probably skip this entire step. Just look on your recent pay stub to see how much is being withheld for federal taxes.)
With the changes for 2018, each allowance reduces your wages for withholding purposes by $159.60, so your income is reduced to $1,603.88. Using this amount, along with the 2018 withholding tables based on the new tax brackets, your per-paycheck withholding should drop to $168.09. Your paychecks should go up by about $96.44 because of the lower federal withholding called for by the tax-law changes.
New W-4s Are on the Way
The IRS has also announced the agency is in the process of designing a new W-4 form, which will more accurately reflect changes in the tax law that could impact workers’ appropriate withholdings, such as the increased child tax credit and changes to itemized deductions. And for 2019, the IRS “anticipates making further changes involving withholding.”
In short, while your federal withholdings are likely to change shortly, there’s a good chance they’ll change again in 2019 once forms and procedures are better adapted to the new tax law.
The IRS says the new tables should result in approximately 90% of workers seeing an increase in take-home pay. Other adjustments to taxes should result in roughly 80% of tax filers getting a cut in 2018, according to the Tax Policy Center. The organization also says the size and percentage of Americans getting a cut will decrease over time.
For more information, or to receive assistance preparing your personal or business taxes, please contact the respected attorneys at Oliver & Cheek, PLLC by calling (252) 633-1930 or visiting www.olivercheek.com.
(Sources: U.S. Department of the Treasury; Internal Revenue Service; Business Insider; USA Today; The Motley Fool; and Tax Policy Center.)