Yesterday the IRS issued more guidance on wage tax withholding rules in response to changes triggered by the Tax Cuts and Jobs Act. Notice 2018-14 provides guidance to both individual taxpayers and employers on tax withholding requirements for wages.
One of the most significant changes is the default rate of withholding on bonuses or supplemental wages is reduced from 25% to 22% retroactive to January 1, 2018. I know that some clients may be affected by the 3% differential in net take home amount on recently paid bonuses.
The bigger picture issue, however, is that this guidance does not address the minority of taxpayers (one in ten nationally but maybe one in four locally) who are facing increased tax liability in 2018 where a reduction in withholding will further increase their tax problem. I strongly recommend that taxpayers with large Schedule A itemized deductions and those with Form 2016 home office, travel or work related expenses should individually calculate their tax liability and make manual adjustments to withholding amounts by filing a new W4 as soon as possible.
Employers may also want to consider plans to restore the tax-free reimbursement of work related expenses since this save money for both the employer and the employees. I am pleased to discuss the services of my practice Freedom Benefits in this capacity.