The new tax law, signed by President Trump last Friday, ushers in the most comprehensive tax reform legislation in more than two decades. Paychex, Inc., a provider of human capital management solutions for payroll, HR, retirement, and insurance services, is offering guidance to business owners implement the provisions of the bill and offer solutions to manage payroll tax obligations.
“The debate is now over and the bill has passed. What’s left is for business owners to prepare for the changes tax reform will bring,” said Martin Mucci, president and CEO of Paychex. “Paychex, with more than 45 years in the payroll and HR industry, is ready to provide the support our clients need to navigate the new tax code, and our systems are ready to implement the updated rates as soon as they become effective. Paychex provides many resources to our clients, from online educational content, videos, and webinars, to 24/7/365 service from experienced payroll specialists, along with on-site HR support.”
The final tax reform bill, which takes effect in 2018, contains numerous provisions affecting businesses and individuals. Here is an overview of the key elements:
What the Law Means for Small Businesses
- Corporate tax rate. The final bill reduces the corporate tax to a 21 percent flat rate from today’s progressive tiered tax rate, which generally ranges from 15 to 35 percent.
- Pass-through deductions. The bill allows deductions for qualified business income for pass-through entities (partnerships, LLCs, sole proprietorships, S Corporations) of up to 20 percent. Complex rules and limitations apply. This provision falls under the individual tax code and would sunset in 2026 without additional legislative action.
What the Law Means for Individuals (2025 Sunset Date)
- Individual withholding rate changes. The bill offers seven progressive withholding rates of 10, 12, 22, 24, 32, 35, and 37 percent (previous rates were 10, 15, 25, 28, 33, 35, and 39.6 percent). The bill also changes the tables that break down the wages to which each of these rates apply.
- Increase in the standard deduction. The new law almost doubles the standard deduction to $12,000 for single filers, $24,000 for married joint filers, and $18,000 for heads of household (in 2017, the deductions were $6,350, $12,700, and $9,350, respectively).
- Child tax credits and repeal of the personal exemption. While deductions for personal exemptions have been repealed, the child tax credit will increase from $1,000 to $2,000. An additional $500 family credit for non-child dependents has also been created. The bill also raises the income level for the credit phase-out, so more taxpayers would be eligible for the maximum credit.
Although many of these changes apply to the individual section of the tax code, employers will need to adjust their income tax withholding for employees. Employers must implement new withholding tables once the Internal Revenue Service (IRS) releases them. The IRS has indicated that it needs time to evaluate the tax changes, so new tables likely won’t be available before the changes go into effect in January. Once the IRS releases the withholding tables, employers will have a transition period in which they can use the old withholding tables while testing the new tables in their payroll systems.
Given the bill's significant shift away from personal exemptions and itemized deductions, it is likely that the W-4 form will also require revision. While it is not yet known what employers will have to do if the IRS releases a new W-4, it is expected the agency will provide guidance.
How Paychex Can Help
Understanding the implications of the final tax bill can be a daunting task. For a full overview, including employee benefit and healthcare analysis, visit our tax reform resource center at www.paychex.com/articles/compliance/tax-reform.
In addition, Paychex can help businesses implement the provisions of the new bill with comprehensive solutions for managing payroll tax obligations. Visit www.paychex.com for more information.