First the disclaimer: nothing in this article should be construed as tax advice. Please consult a CPA or tax professional before making any tax decisions.
Talking tax forms is never fun, is it? But if you’re a business owner with employees, you need to be aware that certain changes to the tax code recently passed by Congress may affect employee withholdings.
The so-called “Public Law 115-97 Tax Cuts and Jobs Act of 2017” (TCJA) was signed into law by President Donald Trump on December 22nd, 2017. The TCJA represents major reforms. However, if you’re a small business owner that only does business in the U.S., there’s no need to panic; the changes that went into effect, more affect corporations operating internationally, says this report by the American Bar Association.
Nonetheless, the changes to the Internal Revenue Code has modified deductions for employees, and if you’re a small business owner, you should be aware of how they can potentially affect the people who work for you.
Wait … What’s a W-4 Again?
But let’s not get ahead of ourselves. Perhaps you’re thinking about starting a business from scratch and you’re researching everything that goes into operating a business. And this includes the not so fun side of business: taxes.
If you’re going to hire an employee (or more than one), the employee(s) need to fill out an IRS W-4 form.
The W-4 form that you will submit to the IRS on behalf of the employee tells the IRS the proper amount of federal tax withholdings that should be taken out of each paycheck.
Although it’s not required by law, the IRS suggests employees submit a new W-4 each year. The reason why is because there can be life changes the employee experiences which would affect their tax withholdings.
For example, an employee can have less taxes withheld from their paycheck if they have a new child (or adopt one), or get married (or divorced). These life situations are called “allowances.” The more allowances an employee claims, the less federal tax withholdings will be taken out of each paycheck.
The more allowances an employee accurately claims, however, the less of a tax refund he or she may get back. In fact, if an employee doesn’t have enough withheld from each paycheck to pay federal taxes, he or she may end up owing money come April 15.
Will the TCJA Affect Employee Withholdings?
In theory, TCJA will lower the amount of money that’s taken out of your employee’s pay checks. Virtually all taxpayers were supposed to get a tax break with passage of TCJA. That’s good news for your workers, right?
Well, the bad news is that according to the federal government’s General Accounting Office (GAO), unless your employees adjust their withholding allowances, they will likely owe more in taxes from last year.
And the easiest way to have your employees adjust their allowances or withholding status is through your point of sale (POS) system. Not all POS systems offer the ease of updating employee forms, however.
Teach Your Employees Well
Is it your job as the business owner to educate your employees about properly filling the W-4 form? Not exactly. However, your employees will appreciate it if you tell them about withholdings. This is especially true for Generation Z hires who have no experience in submitting W-4 forms.
You can tell your new hire that, if, say, they live at home with their parents and don’t have to pay rent, it may be advantageous to have withholdings taken out. This way, the employee will be due a refund. Likewise, let your new hire know that if they have zero withholdings (or too little), they will owe at tax time. If the employee is living paycheck to paycheck, they may need the extra money, and thus will want as little withholdings taken out as possible.
Tell your employee, however, that if they have little federal tax dollars withheld from their paycheck, they should set aside a little amount every month in a piggybank so that they don’t get overwhelmed when they get their tax bill.
More Employees Will Owe This Year
According to Forbes, the GAO estimates that new tax bill will likely result in more people—
32 million U.S. taxpayers—under-withholding on their taxes. This means that these individuals will owe the Fed money.
Are you likely to owe? Forbes’ analysis of the GAO’s predictions states, “Those most likely to under-withhold are married, single wage earning upper-middle-class taxpayers with two children, who itemize their deductions and report additional non-wage income like dividends and interest.”
New Withholding Tables
Not to make your head spin, but the IRS made some pretty significant changes to the W-4 form for 2019. However, due to a big backlash from accountants and payroll service companies, there are only minor revisions.
The best thing you and your employees can do to keep up with the new W-4 form is review the IRS withholding calculator. This will help your employees figure out what their proper amount of withholding should be.
And if you’re still not sure about some issues with the new withholding guidelines, check out the FAQs on the IRS website and consult your accountant or tax professional for further guidance.
Does your POS system easily track employee hours and can it make changes to their W-4s? If not, it’s time for an upgrade. Contact us today for a demonstration.