Impact of the Tax Cuts and Jobs Act on Payroll
There are payroll impacts that are important to note and are summarized below. The ability to deduct several benefits normally provided to employees will also be impacted and may have a greater effect on employees and the way we do business.
Tax Rates and Withholding Calculations
Some of the most widely discussed changes included in the Act are the reductions in tax rates and the number of tax brackets (down to only seven in 2018). In addition, the Act increased the standard deduction to $24,000 for joint filers, $18,000 for head-of-household filers, and $12,000 for all others. However, the personal exemption is suspended until December 31, 2025. As a result, the withholding tables and resulting calculations will change, meaning your payroll system will need to be updated to correctly calculate how much to deduct from employee paychecks.
Employee Achievement Awards
Under the new rules, “tangible personal property” cannot include “cash, cash equivalents, gift cards, gift coupons, or gift certificates (other than arrangements conferring only the right to select and receive tangible personal property from a limited array of such items pre-selected or pre-approved by the employer), or vacations, meals, lodging, tickets to theater or sporting events, stocks, bonds, other securities, and any other similar items.”
Relocation payments are now subject to Social Security, Medicare, and Federal Unemployment Tax. Companies should currently be reviewing their policies around the offering of relocation benefits. The fact that these benefits are subject to employment tax may result in employers limiting the amounts of relocation they are willing to pay due to the increased employment tax expense.
Fringe Benefits-Entertainment and Meals
The Act made substantial changes in the area of fringe benefits, altering the mechanics of several favored benefits. Most prominent, the Act effectively removed the deduction for any activity considered to be “entertainment, amusement, or recreation,” regardless of their relationship to a business function. Taxpayers can no longer deduct membership dues for social, athletic, or sporting clubs or organizations, though they could previously deduct the portion of dues that they were able to substantiate as having a connection to the active conduct of their trade or business. And, by extension, taxpayers can no longer deduct expenses related to facilities used for entertainment, amusement, or recreation, regardless of the business connection.
Taxpayers will also see a change to meal-related fringe benefits. The 50% deduction for food and beverage expenses associated with operations (business meals during travel, for example) remains, but the Act expands the 50% limitation to any food and beverages provided to employees at an eating facility on the employer’s premise that meets both the criteria of a de minimis fringe and that is provided for the convenience of the employer. Previously, employers were able to deduct the full cost of meals meeting the latter criteria.
Family and Medical Leave Credit
Perhaps one of the most substantial tax changes related to employee benefits included in the Act is the creation of a (short term, for now) “family and medical leave credit,” which will allow eligible employers to claim a general business credit of 12.5% of any wages paid to qualifying employees when those employees are on family or medical leave, so long as the payment is made under a qualifying policy that pays at least 50% of the normal wages paid to such employee. That credit can increase by .25% (capped at 25%) for every 1% above the 50% provided in wages. The credit is also capped at 12 weeks’ worth of leave per employee.
To qualify, an employer must provide a written policy which provides all eligible employees at least two weeks of paid family and medical leave each year. This written plan must also permit, on a pro-rata basis, the same type of leave to any employee who is not considered full time. Qualifying employees are any employee who) has been employed with that employer for at least one year; and was not paid over 60% of the compensation threshold for highly compensated employees.