Numerous employer provisions retained in conference agreement on tax reform, IRS to delay 2018 income tax withholding tables

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December 17, 2017
2017-2132

On December 15, 2017, the Conference Agreement on the Tax Cuts and Jobs Act (H.R. 1) was released, along with an explanation of the provisions to which the conferees agreed. The Conference Agreement specifies how the differences in H.R.1 as passed by the House and Senate are resolved. The House and Senate must each now pass the Conference Agreement and submit it to President Trump for his signature. Voting is expected to begin this week with final enactment anticipated by December 25, 2017.

IRS to delay release of 2018 income tax withholding tables

In anticipation of changes that H.R. 1 would make to the individual income tax rates, the IRS issued a statement indicating that the 2018 income tax withholding tables and related guidance will be issued in Notice 1036 sometime in January 2018 with those changes reflected in wage payments as soon as February 2018.

This IRS announcement relieves concerns employers have expressed about the late enactment of the tax bill and their ability to timely incorporate federal withholding tax changes by January 1, 2018.

Under the Conference Agreement, the current seven tax rates of 10%, 15%, 25%, 28%, 33%, 35%, and 39.6% would be modified to 10%, 12%, 22%, 24%, 32%, 35% and 37%. Accordingly, the flat federal rate of income tax withholding for supplemental wages over $1 million would decrease to 37% — 22% for supplemental wages up to $1 million.

H.R. 1, if enacted, would also affect other employer-related provisions that would also take effect January 1, 2018 (e.g., repeal of exclusion from taxable wages for employer-paid moving expenses), but so far the IRS has not indicated if compliance delays will be extended for matters beyond the 2018 income tax withholding tables and methods.

Conference Agreement overview

For the most part, the Conference Agreement follows the Senate version of H.R. 1, which contained fewer provisions affecting employers than the House bill. Specifically, the Conference Agreement does not include the House bill's repeal of such business tax credits as the Work Opportunity Tax Credit and the requirement that employers provide quarterly employee wage detail.

The Conference Agreement also did not adopt the House bill's repeal of the tax-favored status of adoption assistance, dependent care assistance, educational assistance and medical savings accounts.

Fringe benefits considerations

The Conference Agreement contains numerous provisions that would either eliminate the tax-favored status of certain fringe benefits, modify their current requirements or disallow a business deduction for their cost. Employers will need to carefully consider how the new law would affect existing fringe benefit offerings and be prepared to immediately incorporate changes to their payroll system earnings and deduction codes if and when the law is enacted.

Following is a summary of the fringe benefits and employee-related expenses affected by the Conference Agreement.

For more details see this side-by-side chart.

Fringe benefit	Nature of change
Bicycle commuting benefit	The exclusion from federal income tax (FIT), federal income tax withholding (FITW), Social Security/Medicare (FICA) and federal unemployment insurance (FUTA) would be repealed.
Eating facilities — meals furnished for convenience of employer at or near the employer's business premises	The business deduction would be limited to 50% through December 31, 2025, and would be completely disallowed effective January 1, 2026.
Employee unreimbursed business expenses	Through December 31, 2025, employees would no longer be able to claim an itemized deduction (subject to the 2% floor) for businesses expenses incurred on behalf of the employer but not reimbursed by the employer.
Employee achievement awards for length of service and safety	The exclusion from wages subject to FIT, FITW, FICA and FUTA would be repealed.
Entertainment expenses	The business deduction for expenses incurred, or a facility or portion thereof used for these activities, would be disallowed.
Family and Medical Leave — paid leave	A business tax credit would be available if certain requirements are met. Qualified paid leave does not include paid family leave benefits provided under a state plan.
Gross up	The federal flat tax rate would be reduced from 25% to 22% for supplemental wages up to $1 million, and from 39.6% to 37% for supplemental wages over $1 million.
Moving expenses	The exclusion from wages subject to FIT, FITW, FICA and FUTA would be repealed except for Armed Forces on active duty.
Settlements — sexual harassment	The business deduction for settlements paid for sexual harassment and related attorney's fees would be disallowed if contingent on a nondisclosure agreement.
Stock options	A new subsection (i) under Section 83 would be created for the deferral of private company stock options from wages subject to federal income tax and federal income tax withholding. New reporting requirements would apply under this new provision.
Transportation fringe benefits (parking and transit passes provided for other than the safety of the employee)	The business deduction would be disallowed, but the exclusion from wages subject to FIT, FITW, FICA and FUTA would continue to apply, keeping unaffected employee pretax contribution arrangements for transit and parking benefits.
Wage advances and repayments that cross tax years	If the repayment of a wage advance or overpayment crossed tax years and the advance/overpayment were less than $3,000, employees would no longer be allowed to itemize their deductions (subject to the 2% floor) in order to claim a federal income tax credit on the repayment.

View the attached PDF file for a side-by-side comparison of the Conference Agreement to the House and Senate bills.

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Contact Information
For additional information concerning this Alert, please contact:

Workforce Advisory Services - Employment Tax Advisory Services
• Kenneth Hausser	(732) 516-4558
• Debera Salam	(713) 750-1591
• Debbie Spyker	(720) 931-4321

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