IRS 2018 Income Tax Withholding Tables Published

The Internal Revenue Service released Notice 1036, January 11, 2018.  This updates the 2018 income tax withholding tables reflecting changes made by the Tax Cuts and Jobs Act of 2017.  This is the first step of many in the IRS’ promise to publish updates regarding the changes made by the tax reform legislation.

The new tables are needed to reflect the changes in tax rates and tax brackets, increased standard deduction and removal of personal exemptions that were included in the new tax reform law signed in December.  The withholding guidance issued today is for employers to make changes to their payroll systems and is designed to work with existing Forms W-4, Employee’s Withholding Allowance Certificate that employees already have on file.

Percentage Method Tables

Below is an example of the new Tables based on Annual salaries.  The wage amounts shown in the tables are net wages after the deduction for total withholding allowances.

The 2018 Percentage Method Withholding Tables can be found in Notice 1036 here: https://www.irs.gov/pub/irs-pdf/n1036.pdf

The withholding allowance amounts by payroll period have changed. For 2018, they are:

Supplemental wages of $1 Million or Less  

If you withheld income tax from an employee’s regular wages in the current or immediately preceding calendar year, you can withhold a flat 22% on supplemental wages identified separately from regular wages.

Supplemental Wages in Excess of $1 Million

If a supplemental wage payment, together with other supplemental wage payments made to the employee during the calendar year, exceeds $1 million, the excess is subject to withholding at 37%. Withhold using the 37% rate without regard to the employee’s Form W-4.  Regardless of the method you use to withhold income tax on supplemental wages, they are subject to social security, Medicare, and FUTA taxes.

Backup Withholding

You generally must withhold 24% of certain taxable payments if the payee fails to furnish you with his or her correct taxpayer identification number (TIN). This withholding is referred to as “backup withholding.”

Employers Must Implement by February 15, 2018

Employers are instructed to begin using the new tables as soon as possible, but no later than February 15, 2018.  Most employees can expect to see changes in their paychecks to reflect the new legislation in February.

Paylocity intends to implement these new tables into Web Pay as soon as possible, and before the IRS deadline of February 15, 2018. We will notify clients when the new tables have been deployed to Web Pay.  We recommend that you notify employees at the time we deploy the tables so they understand why there is a change to withholding and net pay. Paylocity continues to monitor current and pending legislation as it develops and we will continue to provide updates as soon as possible.

What to Expect

Below is one example of the impact of the changes based on a person claiming Married Filing Jointly with one allowance and an annual salary of $52,000.  We have prepared a comparison of withholding calculated with 2017 withholding tables versus the new 2018 withholding tables. For simplicity, only the Federal Income Tax Withholding Calculation is shown without benefits and other taxes.

Regarding Exemption Allowances

There is no need to have employees complete a new Form W-4.  The IRS has designed the new tables to minimize taxpayer burden as much as possible.  As stated above, the Forms W-4 that employees have already filed with their employers to claim withholding allowances will work with the new tables.

In the meantime, the IRS is working on a revised Form W-4 that will more fully reflect the new legislation.  At that time, the IRS will provide taxpayers with information and tools to determine whether they need to adjust their withholding.  For tax year 2019, the IRS anticipates making further changes involving withholding.

Thank you for choosing Paylocity as your Payroll Tax partner. Should you have any questions please contact your Paylocity Account Manager.

This information is provided as a courtesy, may change and is not intended as legal or tax guidance. Employers with questions or concerns outside the scope of a Payroll Service Provider are encouraged to seek the advice of a qualified CPA, Tax Attorney or Advisor. 

Common Questions

What is a Withholding Table?

A withholding table shows payroll service providers and employers how much tax to withhold from employee paychecks, given each employee’s wages, marital status, and the number of withholding allowances they claim.

What is a Form W-4?

This is an IRS form that employees provide to their employers, to determine the amount of federal income tax to withhold from the employees’ paychecks. The form helps employees adjust withholding based on their personal circumstances, such as whether they have children or a spouse who is also working. The IRS always recommends employees check their withholding any time their personal or financial information changes.

What are supplemental wages?

Supplemental wages are wage payments to an employee that are not regular wages. They include, but aren’t limited to, bonuses, commissions, overtime pay, payments for accumulated sick leave, severance pay, awards, prizes, back pay, retroactive pay increases, and payments for nondeductible moving expenses. To determine how to properly tax supplemental wages, please refer to Notice Number 1036.

This information is provided as a courtesy, may change and is not intended as legal or tax guidance. Employers with questions or concerns outside the scope of a Payroll Service Provider are encouraged to seek the advice of a qualified CPA, Tax Attorney or Advisor.