Make adjustments now for these tax code changes
Another year has come and gone. As we bid farewell to 2017, payroll administrators need to consider several new changes for 2018. To reduce your risk of noncompliance penalties, stay informed of updates that may occur throughout the year.
U.S. employers should be aware of several IRS and state changes that will take effect in the New Year. There were also changes to minimum wage and income tax items in the U.K. Autumn Budget released by Chancellor of the Exchequer, Philip Hammond on November 22, 2017. These changes would not come into effect until April 6, 2018.
Income tax changes for U.S. and U.K. employees
Now that the tax reform bill has passed both houses of the U.S. Congress and the U.K. Autumn Budget has been presented, both U.S. and U.K. employers will need to make adjustments to employee’s income tax withholding.
In the U.S., new tax rates went into effect on January 1, 2018. There are seven tax brackets. The IRS is working hard to update employer withholding tables for the New Year, but it is going to take into January to complete. According to the Chicago Tribune, most employers won’t be able to make withholding adjustments until February. Because income taxes will decrease for most employees, this may cause a slight over-withholding in 2018.
In the U.K. income tax changes will be as follows:
- The standard personal allowance (the amount of tax-free income an employee with a salary up to £100,000 can earn) will rise to £11,850. However, for higher earning employees, the personal allowance reduces by £1 for every £2 over £100,000.
- The income threshold for applicability of the higher rate of personal income tax will rise to a total of £46,350, which is the sum of £34,500 taxable income plus the £11,850 tax-free personal allowance.
New taxable maximum for U.S. Social Security
In late November, the Social Security Administration (SSA) revised the maximum amount of earnings subject to the Social Security tax for 2018. Based on the SSA’s estimate of inflation-adjusted wage growth, the taxable earnings maximum has increased to $128,400. According to SHRM, about 12 million workers will pay more in Social Security taxes because of this increase, which began on January 1, 2018. Employers should adjust payroll systems to account for the higher wage base and notify affected employees.
Employee-paid portion of U.S. Medicare tax
Be sure to make all necessary withholding adjustments for highly compensated employees. Under the Affordable Care Act, an additional 0.9 percent Additional Medicare Tax applies to wages, compensation, and self-employment income that exceeds threshold compensation amounts. To learn more, visit the IRS webpage covering this topic.
Minimum wage changes in U.S. and U.K.
Seventeen U.S. states have announced minimum wage increases for 2018 and beyond. More than half of states and Washington, D.C. index minimum wages to automatically rise with the cost of living—and Minnesota will join that list in 2018. Since rules and amounts are constantly shifting, you should check for legislative changes frequently.
In the U.K., minimum wages will rise across the board, starting April 6, 2018:
- National Living Wage (minimum wage for over-25s) to rise from £7.50 to £7.83 an hour
- Minimum wage aged 21-24 to rise from £7.05 to £7.38
- Minimum wage aged 18-20 to rise from £5.60 to £5.90
- Minimum wage aged 16-17 to rise from £4.05 to £4.20
- Apprentice wages to rise from £3.50 to £3.70
New contribution limits go into effect for retirement plans
In the U.S., the IRS announced new employee contribution limits for 2018. Employees can now contribute up to $18,500 in their 401k accounts and flexible spending accounts will now cap at $2,650 annually. These pretax payroll deductions reduce an employee’s taxable wages. Inform your employees so they can take advantage of savings opportunities.
In the U.K., the lifetime allowance for pension savings will increase to £1,030,000 for 2018-19.
Use this checklist to start 2018 with confidence
Wages, withholdings, contribution limits, and taxable earnings are constantly changing. To make sure you stay in compliance, follow this checklist:
- Review employee salaries and make necessary adjustments for cost-of-living increases (COLA).
- Update the payroll system to reflect 2018 income tax rates and withholding limits. Inform employees if they are subject to new rates due to higher wages or changes to taxable-maximum amounts.
- U.S. employers: Find out if there are new wage limits for FUTA/SUTA withholding.
- Apply minimum wage changes in the U.K. and applicable U.S. states and localities.
- Keep up with new legislation. For example, monitor the IRS website for updates about 2018 withholding tables.
- Conduct a tax withholding checkup. In the U.S., ask employees to review their W-4s and make necessary adjustments.
- Confirm your 2018 payroll schedule and prepare for the first payroll run of the year.
Be prepared for payroll and tax filing changes
Take the necessary steps now to be in control of your 2018 payroll. Stay informed of all legislative changes so you can reduce the risk of noncompliance penalties. An automated Payroll and Tax Management solution from Asure Software can help you stay abreast of payroll compliance changes and process accurate, timely payroll every payday.