Sara Oakes
Associate Editor
Loyola University Chicago School of Law, JD 2019
On December 20, 2017, Congress passed the Tax Cuts and Jobs Act (“TCJA”) designed to decrease the taxable rate for corporations and individuals, and to limit allowable deductions. Since this change to the Tax Code was one of the largest since the Reagan era, the Internal Revenue Service will need to publish many regulations in the coming months to better clarify provisions of the TCJA. This multi-part series will explore prominent IRS regulations as they relate to the TCJA, and what these regulations mean for both individual and corporate taxpayers.
Historically, the IRS has always required employers to take a withholding tax from its employees. The withholding tax is an income tax withheld from employees’ wages and paid directly to the government by the employer, and the amount withheld is a credit against the income taxes the employee must pay during the year. The withholding tax is an advance payment of federal income tax liability with any overpayment returned to the taxpayer at the end of the year. Recently, the IRS has released a Notice to discuss the updated withholding amounts to coincide with the TCJA.
Withholding Adjustments
Since most of the changes under the TCJA are not applicable to the 2017 tax year, the IRS has some time to publish regulations to interpret and clarify these changes to the Tax Code. However, both employers and employees should be able to begin to feel the effects of these new laws as early as this month. When the IRS released Notice 1036, it encouraged employers to change the withholding rates immediately. However, all employers must start using the 2018 withholding rates by February 15, 2018. The IRS has not released an update to the W-4 form but intends to release an update to the W-4 by early 2019. Under Notice 1036, the IRS has updated the withholding allowance amounts because of the changes under TCJA. The 2018 withholding amounts are as follows:
| Payroll Period | Single Withholding Allowance |
| Weekly | $79.80 |
| Biweekly | $159.60 |
| Semimonthly | $172.90 |
| Monthly | $345.80 |
| Quarterly | $1,037.50 |
| Semiannually | $2,075.00 |
| Annually | $4,150.00 |
| Daily or Miscellaneous | $16.00 |
Each year, the IRS releases tables providing the withholding allowances that are required by the employee and the employer for each pay period. Unlike previous years, the 2018 withholding amounts consider the increase in the standard deduction, repeal of personal exemptions and changes in tax rates. Therefore, the 2017 allowances compared to 2018 show there is not a significant increase in these amounts.
Social Security and Medicare Tax
In 2018, the social security tax rate is 6.2% for both the employee and employer. Once an employer reaches $128,400, the social security tax no longer applies. The Medicare tax rate is 1.45% for both the employee and employer. When an employee exceeds the threshold amount of $200,000, an additional 0.9% is withheld from the employee’s payroll. Although the social security tax has a wage base limit, the Medicare tax does not. The wage base limit is the maximum wage that is entitled to the tax for a taxable year.
How are these withholding amounts different from Pre-TCJA?
Before the TCJA, the withholding amounts for employees and employers was lower. However, these withholding amounts have only slightly increased. Last year alone, the weekly withholding amount was only $2 less than the withholding amount for 2018. This likely means that the IRS is anticipating lower tax rates will make it less necessary to withhold more money, as the taxpayer will likely retain more of their earnings.
Unlike the changes to the withholding amounts for 2018, the social security and Medicare tax rates are unchanged. The TCJA did not provide changes for these tax rates which are independent of the individual tax rates. Therefore, these withholding rates remain the same as the 2017 withholding rates.
How will these withholding changes affect Employees?
Under the new tax law, it is unclear how the withholding amounts will affect an employee However, because the tax rate for individual taxpayers decreased, the IRS assumes that individuals will be able to recover more of their take-home pay. Although the IRS does not definitively know how these new tax rates will affect taxpayers, it is likely that most taxpayers will owe fewer taxes than in previous years.
Employees should still look at their withholdings to ensure that your employer is taking the correct amount of taxes. Whether an employer withholds the correct amount of taxes depends upon an employee’s withholding status, the number of allowances, and the amount of gross pay per pay period. The IRS anticipates that if employee maintains similar withholding statuses to previous years, the new tax plan is likely to benefit the employee. This apprehension will be absolved once employees file taxes for this year.