Here's what it means to your company and employees.
The Tax Cuts and Jobs Act has passed Congress. Today, the president signed the bill into law.
Here are some of the key changes that may impact your company or employees.
Changes that impact your company:
Corporate tax break
Perhaps the biggest news is the corporate tax break, reducing the tax from up to 35% to 21%, allowing companies to strengthen the market with more workers and higher wages. Nextep encourages all clients to consult with your financial advisors to assess what this change will mean to your company.
Tax credit for pay during FMLA
The act includes a tax credit for employers who pay at least two weeks of qualifying employees' salaries during time off under the Family Medical Leave Act (FMLA) during 2018 and 2019. While paying employees during time off under FMLA is an option that many employers do not exercise, the act provides tax credits for those who do.
Some exclusions to this credit do apply. For example, qualifying FMLA pay must be above and beyond any accrued PTO, the employer must have a written policy that provides a minimum of 50% pay for two or more weeks of FMLA, and certain income limitations apply. Contact your HR consultant at Nextep to review and amend you handbook policy as needed and for case-by-case guidance.
Employer-paid commuting expenses taxable
If your company pays for your employees’ commuting or parking expenses, you will no longer be able to deduct it from corporate taxes. Please note, this provision does not include the parking and transit FSA, which allows individual employees to set aside their own funds to pay for commuting expenses tax-free. The FSA is still intact. Tax deductions for employer subsidizing of commutes is not.
Reduced snack tax break
Many companies provide employees with free meals, snacks, and beverages at work. The company tax deduction for this expense is now reduced to 50% of the cost and will phase out completely in 2025.
Changes that may impact individual employees:
Insurance mandate cut
Included in the tax bill is a provision that does away with the individual mandate to carry health insurance, effective 2019. The mandate for employers to offer affordable, minimal essential coverage to eligible employees remains unchanged.
While employers must still offer qualified benefit coverage, removing the individual mandate is expected to significantly impact all medical insurance coverage options and costs once effective. Additional legislation may potentially be drafted and enacted to prevent sharp cost increases to premiums before the 2019 effective date. As your partner, Nextep will continue to follow the latest developments.
Tax withholding reduced temporarily
Most households will see temporary individual tax breaks. Individual tax breaks will expire in 2025, with the expected majority of the tax burden at that time expected to fall to the middle class. Congress tentatively plans to prevent this tax burden from occurring prior to the 2025 effective date.
What this means to employees: tax rates will change. Employees can expect to begin the year with the current version of IRS's circular e tax withholding, then change to the new tax rates as soon as the IRS mas made revisions. Nextep encourages your employees to review their pay stubs regularly to see how the changes affect them and send any W-4 changes to Nextep as needed.
Medical expense deductions increased temporarily
The tax bill includes several individual mandates outside the scope of your employer relationship as well, including deductions for personal medical expenses. Earlier versions of the bill would have cut deductions for medical expenses. That provision was eliminated during revision. Congress further reduced the minimum amount of expenses needed to claim a deduction in 2018 and 2019 to 7.5% of the taxpayer’s income, returning to the standard 10% in 2020.
Deductions for student loans and child tax credits remain intact in the final version of the bill. The child tax credit has also been doubled to a maximum of $2000 per child. Once the tax bill is enacted, employees can expect to see different returns than they are accustomed to when they file W-2 forms.
For more information, you may consult the revised tax code here.