The long-awaited tax legislation, formally known as the Tax Cuts and Jobs Act, enacted December 22, 2017, is hailed as “sweeping” reform by some. While you may wish you could just “sweep” it under the rug and keep rolling, nevertheless, this is a new year and there are new rules.
Just as the Tax Relief Act of 2010 (which temporarily reduced the employee portion of the FICA payroll tax, causing employees to clamor for that increased paycheck in January 2011), you probably have employees knocking on your door wondering when their tax cut will hit their check. Here’s the scoop, with some fine print at the end.
On January 11 of this year, the IRS released Notice 1036, which updates the income tax withholding tables for 2018, reflecting the changes in the tax law enacted in December. Employers should begin using the new rates as soon as possible, but no later than this Thursday, February 15.
The new withholding tables are designed to work with Forms W-4, Employee’s Withholding Allowance Certificate, which employees already have on file. Employees do not have to fill out new ones at this time. The IRS notes on its website that a new version of the Form W-4 will be released shortly. Until the new form is issued, employees should use the 2017 Form W-4.
The new law increases the standard deduction for employees. The IRS is working on a revised tax calculator. Employees can use the new Form W-4 and the revised tax calculator to update their withholding in response to the new law or changes in their personal circumstances in 2018.
Your software provider should incorporate the new rates into the accounting payroll applications. If you outsource your payroll, contact your payroll provider to discuss any concerns about implementing current tax rates. If you prepare your payroll in-house, contact your software provider for the latest release containing the tax updates.
The new legislation may impact your fringe benefits, such as qualified transportation, any parking facility used in connections with qualified parking, or any on-premises athletic facility.
This new provision does not apply to amounts directly connected with an unrelated trade or business that’s regularly carried on by the organization. If you offer these benefits, seek counsel to address the tax implications.
The new tax law has implications on nonprofit compensation packages in excess of $1 million. A survey of Form 990s, performed by the Wall Street Journal, uncovered that about 2,700 employees of 501c(3) nonprofits received annual compensation of more than $1 million in 2014. The tax code has always had a clause against executive compensation of nonprofit executives; however, the new law labels any compensation of more than $1 million as excessive. If you have complex compensation packages for your executives, your board and other decision-makers are encouraged to carefully consider the impact of the new regulations and seek counsel on how to best address them.
Investment Income of Private Colleges and Universities
The Tax Act adds a section that imposes a 1.4 percent excise tax on the net investment income of certain applicable educational institutions.
Unrelated Business Income Tax (UBIT)
Unrelated business income is defined by the IRS as income that comes from an activity engaged in by a tax-exempt organization that’s not related to the tax-exempt purpose of that organization. Previous to the Tax Act, organizations could aggregate the unrelated business activities. The Tax Act amends those provisions and now requires exempt organizations with one or more unrelated trades or businesses to compute unrelated business taxable income separately. Organization will need guidance on which activities may be considered a single trade or business under the new law.
The Fine Print
Tax law is complicated and has different implications for different organizations. If you have specific questions about how the law applies to your organization, we recommend you consult with your tax advisor.