CheckWriters analyzes tax reform bill, offers solutions for employers
On December 22, 2017, President Trump signed the Tax Reform bill into law.
With such a large bill, it’s difficult to immediately gauge its full effect on business. However, there are a number of high-profile provisions that employers should keep in mind.
Among these are the ACA mandates, a new Paid Family Leave Credit, and effects on Tax Withholding and Forms W4. There are also new corporate tax rates and pass-through deductions.
1. The ACA: Employer Mandate vs. Individual Mandate
The bill does not repeal the ACA employer mandate – applicable large employers still need to offer health coverage to their full-time employees and comply with the law. However, the bill does repeal the individual mandate effective 2019, which requires most Americans to obtain health insurance.
“Employers need to proceed with ACA compliance exactly as before – despite the passage of this bill,” says Bridget Boisvert, the Special Projects Manager responsible for overseeing ACA implementation, compliance, and reporting at CheckWriters.
“While the employer mandate and individual mandate were designed to support the ACA as a whole, only the individual mandate has been repealed (or, more specifically, the fine has been reduced to zero). The employer compliance and reporting obligations remain law.”
2. New Paid Family Leave Credit
The bill includes a new federal tax credit for employers who offer paid family or medical leave to their employees. To be eligible, employers must offer at least two weeks with a minimum compensation level of 50% of the employee’s regular earnings.
The credit amount ranges from 12.5% (if employee receives half regular earnings) up to 25% (if employee receives entire earnings) of the cost of each hour of paid leave. Importantly, the credit applies only to employees earning less than 72,000 per year.
“On the surface, a new employer tax credit is a positive. But it’s simply too early to determine whether this credit will be meaningful and have a positive impact – we’ll need to await further details and regulations,” says Carly Fallon, HR Director at CheckWriters.
"Employers should note that this tax credit is rewarding companies only if they offer paid family leave. There is no credit for companies who do not offer this benefit to employees, and may not have the resources to implement a paid family leave policy."
"Finally, there is no law mandating paid family leave at the federal level. However, California, New Jersey, and Rhode Island all have paid family leave laws on the books, with New York's taking effect in 2018."
3. Effect on Tax Withholding and Forms W4
The bill largely eliminates the concept of personal exemptions and lowers rates overall – which will drastically change the way payroll tax departments determine how to withhold income taxes from employee pay.
“While tax reform represents a dramatic shift in a short period of time, the IRS recently communicated that they are taking the steps to prepare guidance on withholding for 2018,” says Jill Grasso, Tax Manager at CheckWriters. “They’ve also indicated that they’ll be working closely with payroll and tax professionals during this process.”
4. New corporate rates and pass-through deductions
Finally, one of the most talked-about features of the tax reform bill are the new rates. Of particular interest to employers should be the new corporate tax rate and the changes in tax treatment for businesses organized as "pass-through" entities (i.e. partnerships, LLCs, sole proprietorships, and S Corps).
The new corporate tax rate has been reduced to a flat 21 percent from a top rate of 35 percent.
The tax changes for "pass-through" entities are a bit more complicated. However, employers organized in this way should know that generally speaking, the new tax reform bill allows for deductions for qualified business income of up to 20% (but, there are a number of rules and limitations that apply).
"Like with any big reform bill coming out of Washington, it's going to take some time for the business community to sort through this thing and determine what actions employers need to take," says Pete Whelan, Executive Vice President at CheckWriters.
"Our job at CheckWriters is to be available to these folks as a resource, particularly as the inevitable questions and case-by-case scenarios arise. Our team of tax professionals, client representatives, and HR specialists are well-prepared to field these inquiries as they come in throughout the year."