Impact of 2018 federal income tax withholding tables: what will they mean for your employees?

Starting by February 15, U.S. businesses should be implementing the new federal income tax withholding tables while continuing to use the 2017 tables for January (see our January 11, 2018 blog post for more information).

Accordingly, a payroll update for 2018 for Advanced Accounting users is now available. Our 2018 update is now available that includes implementation of the new federal tax tables discussed below plus changes for about 10 states along with the new federal supplemental wage rate, some 941 related changes, and a new payroll tax calculator option.  

More information:  Advanced Accounting year end and latest payroll information

Because several of our accounting software end users attempted to initially implement the tables prior to our releasing an update for them (Advanced Accounting has the ability to enter federal and state tax table changes directly, although typically there may be other computational changes that require an update for certain states), prior to releasing our 2018 payroll tax update, we decided that because of reported difficulties two users had plus in light of all of the publicity surrounding the new rate changes, it would be prudent to analyze what the changes actually can be expected to mean, and to also determine the relative impacts of martial status and dependents with respect to a range of wage amounts.

Our analysis (embedded below; an external link to the document is contained below the embed) focused on monthly wage amounts simply because most household budgets are month oriented.  The monthly wages assume that they are net taxable wages.  We then made a comparison of what the monthly withholding amounts were for the same wage and marital status for a range of monthly wages with withholding allowances ranging from zero to four.   We then computed the monthly increase and the percent reduction in comparing 2018 to 2017.   And we then also took an average increase and percent reduction for wages in the $2000/mo. to $7000/mo. range for each marital status and exemption combination.   All withholding calculations were made by Advanced Accounting's payroll tax calculator.

Results:  employees will see a fairly significant reduction in their federal income tax withholding once the new tables are implemented.   For employees in the $2K to $7K range, the reduction will be typically in the roughly 18% range in most cases.

While the percentage reductions are fairly consistent across most wage limits and regardless of marital status, Single status results in higher monthly savings (on average in the $35 to $40 month range for the $2K to $7K ranges) because of the higher withholding amounts assessed to employees with that status.

We noticed some odd/inconsistent results in comparing Single status withholding differences in higher monthly income ranges (i.e. with nominal differences compared to all others analyzed).

2017 to 2018 FIT comparison document link 

Commentary:  the new tables use the same sort of withholding allowance logic as in the past.  Yet personal exemptions have been eliminated for year end individual federal income tax filings.  More changes may be coming as the year proceeds and we would advise all employees to review their tax withholding status by the end of the third quarter of this year to see how close the new withholding will be approximating their tax liability.  Many states have made changes and more will likely do so.   Some states that have not made changes are realizing that the change while not impacting current withholding tax logic will in fact change individual tax liability for year end filings, causing more taxes to be payable than last year (Utah is one example) or there may be some where the reverse could be true.

2018 early release notice 1036

An early release notice was published by the IRS on January 9, 2018 providing an initial look at the upcoming federal income tax withholding rate changes.

Notice 1036: Early Release Copies of the 2018 Percentage Method Tables for Income Tax Withholding

These are not the official tax tables.  Publication 15/Circular E has not yet been released.

In a related updated 2018 statement, the IRS has indicated that:

Employers should begin using the 2018 withholding tables as soon as possible, but not later than Feb. 15, 2018. They should continue to use the 2017 withholding tables until implementing the 2018 withholding tables.

Some initial changes besides those outlined in a prior recent blog post include:

The annualized withholding allowance is now $4,150 (it was $4,050). This corresponds to the Advanced Accounting US0 tax code that users will need to update in due course.

The supplemental wage withholding is now 22% (was 25%). This is the first year that rate has changed in quite some time. This change is not end user configurable but will be available in our 2018 payroll updates that will be released later this month as the dust continues to settle.

Comments:

A curious aspect of these tables relate to withholding allowances.  Since personal exemptions have been eliminated, why then are there still withholding allowances?

While we have not yet seen a specific answer to this question, because the IRS wanted to allow employers to continue to use existing W-4 forms and due to the last minute nature of the new law, the rate calculations are presumably attempting to take the elimination of personal exemptions somehow into account.  It is hard to see however how well that will work by year's end, at least for some employees.

Other miscellany:

A new form W-4 will ultimately be forthcoming but existing W-4 forms can continue to be used.

Yesterday we made some changes to the 941 worksheet option to synchronize it with the numbered lines on the IRS 941 form including the currently released draft form for 2018.  That update will be included in the payroll updates to be released later this month for Advanced Accounting.