Payroll Tax Reform: All the Stats, Facts, and Data You’ll Ever Need
With the passing of tax reform, there is a lot of confusion surrounding the Tax Cuts and Jobs Act. Many changes made by the Tax Cuts and Jobs Act (TCJA; Pub. L. 115-97) continue to impact HR professionals. Considering the changes remain in effect through 2025, it is important to have a better understanding of how it affects you. Here we take a look at payroll tax reform to provide the information you need.
Tax Rates and Brackets
The TCJA has seven tax brackets. Tax rates and taxable income levels are adjusted with tax rates used to determine supplemental and backup withholding rates. It is important to familiarize yourself with the rates, so you are using the correct numbers based on the income tax year.
Withholding on Supplemental Wages
There are two levels for withholding income tax from supplemental wages at a flat rate:
- Optional flat rate: 22% for supplemental wages of up to $1 million.
- Mandatory flat rate: 37% for supplemental wages exceeding $1 million.
Backup Withholding Rate
The backup withholding rate is lowered to 24% from 2018 through 2025.
Personal Exemption Elimination and Income Tax Withholding
The personal exemption claimed by taxpayers, their spouse and dependents have a standard deduction of:
- $24,400 for married individuals filing jointly
- $18,350 for head-of-household filers
- $12,200 for all others
The 2019 amount is $4,200.
Federal Tax Levies
Refer to the new Notice 1439 to find the revised Publication 1494. This shows you the Tables for Figuring Amount Exempt from Levy on Wages, Salary, and Other Income. Here you will find the updates and instructions for levy notices as they apply to Form 668-W.
Other Areas Important to Payroll
There are other areas affected by the TCJA for payroll professionals including:
- The suspension of the fringe benefit for moving expenses other than some military-related moves
- A new employer tax credit available for paid family and medical leave
Also, keep in mind that individual states might revise their employee withholding allowance certificates. They can also decide to change the version they follow for the Internal Revenue Code.
Paying Payroll Taxes Online
Once you collect the federal withholding tax from employees, you have the option to make a payment online using the Electronic Federal Tax Payment System (EFTPS). This will vary from state to state, with each having their own electronic or manual process for state payroll tax submissions.
Federal tax filings must be submitted to the IRS, while state payroll tax filings are paid to the related state agency, and Form W-2s goes to the Social Security Administration.
Payroll Taxes and Percentages
Both the IRS and state tax agencies provide an annual table to help you determine how much taxes should be withheld from each paycheck. This is dependent on the employee’s:
- Gross wages
- Filing status
- Number of withholding allowances/exemptions
- Pay frequency
FICA combines Social Security and Medicare taxes which have specific rates and thresholds. The Social Security tax rate is 6.2% for 2019 on the first $132,900 of wages, while the Medicare tax rate is 1.45% on the first $200,000 of wages. Wages paid above $200,00 pay an additional 0.9% for Medicare.
States Without Income Tax
The following states don’t have income tax on wages:
- South Dakota
Keep in mind that although New Hampshire and Tennessee don’t tax wages, taxes are applied to some dividends and interest income.
Understanding Payroll Tax Penalties
Tax penalties are applied when you fail to pay taxes, make late payments or fail to follow the correct guidelines. To avoid penalties, you must ensure the following criteria are met:
- The deposit is made on time
- The deposit is in the correct amount
- The deposit is made correctly
If you fail to meet these criteria your company will be subject to the Failure to Deposit (FTD) penalty. The fee is based on a percentage rate and the number of calendar days a deposit is late starting from the date of the late deposit.
For amounts not properly or timely deposited, the penalty rates are:
- 1–5 days late: 2%
- 6–15 days late: 5%
- More than 15 days late: 10%
- For required deposits not paid by Electronic Funds Transfer: 10%
As well, if payment is not made following the 10 days after the first notice payment is due, the rate is 15%.
To ensure your company’s payroll tax filing is compliant, it makes sense to work with a tax specialist, approved by the IRS. As well, a modern payroll tax system helps keep payments accurate and ensures you file on time.
About The Author
Kayla is the Marketing Manager at Paypro Corporation overseeing all inbound and outbound marketing and sales efforts. She has 7+ years of experience working within the B2B and SaaS based solutions space and thrives on creating messaging and campaigns that introduce products and services to those who need them most.