Payroll Tax and Compliance Update for Employers

02/22/18 | 2:43PM | Posted by Nina De Forge

CATEGORIES: Best Practices, News

The latest payroll tax and compliance changes you need to know.

As the payroll and compliance product owner for TEAM Software, part of my job is to stay current on what’s happening in the payroll and compliance world to ensure our solutions continue to meet our clients’ needs. Over the last couple of months, there has been an array of changes and updates in response to the Tax Cuts and Jobs Act of 2017 (TCJA). Maybe you’re familiar with some of the legislation or have heard about it in the news. Don’t worry, though, you don’t have to read the bill to be informed. I’ve summarized the key points that can affect employers here:


New Federal Withholding Tables

On January 11, the IRS released Notice 1036. Here’s the rundown:

  • All the withholding allowance amounts have increased.
  • The optional flat rate for supplemental wages up to and including $1 million has decreased to 22 percent.
  • The mandatory flat rate for supplemental wages over $1 million has decreased to 37 percent.
  • The backup withholding rate has decreased to 24 percent.
  • The deadline to implement the tax tables was February 15, 2018.​


Fringe Benefits

For tax years 2018 through 2025, the TCJA suspends the fringe benefits for qualified moving expenses and qualified bicycle commuting costs. ​

Affordable Care Act (ACA)

The TCJA does not change the obligation of applicable large employers to offer ACA-compliant insurance to their full-time employees and to report the offer to the IRS. However, it does effectively eliminate the individual mandate by reducing to zero the penalty for not purchasing insurance beginning in tax years after December 31, 2018.


Supplemental and Backup Withholding Rates

For 2017, the mandatory withholding rate on supplemental wages exceeding $1 million is 39.6 percent. The legislation effectively lowers that rate to 37 percent for tax years 2018 through 2025. ​

Because the tax rate on supplemental wages of up to $1 million is tied to a section of the Internal Revenue Code that is suspended for tax years 2018 through 2025 by the tax reform legislation, it appears that the withholding rate will increase to 28 percent (from 25 percent) for those years, but the IRS has not yet confirmed the new rate. ​

The backup withholding rate will be reduced from 28 percent (in effect for 2017) to 24 percent for tax years 2018 through 2025. ​

New Federal W-4

The IRS is working to revise Form W-4, Employee’s Withholding Allowance Certificate. The revised calculator and new Form W-4 can be used by employees to update their withholding in response the TCJA.


UPDATE: The IRS released the new Form W-4 and updated Withholding Calculator on February 28. Learn more.

State W-4

If you live in one of the states that uses the Federal W-4 and/or taxable earnings for reporting, you’re probably asking, “what’s the plan?”. Well, the jury’s still out on this one. Once the new federal W-4 is available, we’ll have a better idea of what states will decide to do. For reference, the following states follow the current Federal W-4: Nebraska, Idaho, Minnesota, Montana, North Dakota, South Carolina, Utah, New Mexico, Oklahoma, Colorado, Delaware and Oregon​.


With all the updates and changes happening, it can be hard to keep everything straight. Here are some helpful resources to find the latest information:


TEAM is dedicated to ensuring our software solutions meet the ever-changing compliance needs of our customers. While we’re committed to keeping you informed, it’s important to do your own research and consult your own legal and tax advisors when necessary, too.

Nina De Forge

Nina joined the team in 2017 and is the Compliance and Payroll Product Owner. Nina, also known as “9,” has been working with human resources, payroll and tax compliance since the 1980s and has a broad range of experience across each discipline. She is an active member of many industry organizations, including the IRS Information Reporting Advisory Committee and its Nationwide E-Filer’s National Focus Group, the Canadian Payroll Association, the Society for Human Resource Management and the International Association for Human Resource Information Management. She is a published author in the book American Payroll Association Basic Guide to Payroll. Outside of her career work, Nina is a hobby photographer.