Seeing your organization’s taxes go down in 2018 might be cause for celebration, but the situation is far from straightforward. Even a single small change to tax law can have ripple effects throughout your entire business. What may seem like a positive change on the surface can have different consequences that are unique to an industry, company, or department. As the leader of a small or medium-sized enterprise, you know you can’t simply cross your fingers and hope things work out appropriately. It’s imperative to understand what new tax laws mean for your business and determine what changes may need to happen to stay compliant while maximizing tax savings.
One major consideration surrounding the new tax laws is how to calculate employee payroll tax withholding. As the employer, you’re in charge of knowing how much to withhold from employee paychecks. In large corporations, there might be a seasoned accounting or HR department that can take on this challenge. But in smaller businesses, this burden often falls on the shoulders of the owner or chief executive who must step away from their core business concerns to suddenly look at a complex tax situation.
Of course, there are publications that help business leaders get a lay of the land. These outline three main steps for calculating payroll tax withholding: determining taxable workers, determining taxable wages, and then based on those, calculating the appropriate withholding. Considering these elements can help form a plan for addressing new withholding amounts, but they represent a very simplified view as so many rules go into determining each step. Plus, each business is unique and may need to address their finances differently from how they are outlined in general guidelines.
Outside of maintaining compliance with new tax laws, the reason withholding is so important is because this is where your employees see a direct impact to their paychecks. One tiny change here, or even a headline in the news that hints at this, can cause a great deal of concern. Understandably, employees want to immediately know how their own taxes and paycheck will be affected.
The IRS Withholding Calculator can be helpful, allowing individuals to estimate what their new taxes might look like. After compiling the appropriate information and depending on the outcome of the calculator, employees may need to file a new W-4 form. While online calculators can be really helpful, they may not be 100% accurate for your staff and should not be relied upon solely. For certain complex tax situations, the IRS instructs using publication 505, which they state isn’t even updated at the time of this writing.
All of this illustrates the importance of educating employees about the new tax laws and setting the right expectations. Nobody wants to end up filing taxes in 2019 only to find out they suddenly owe a great deal or are receiving a miniscule refund compared to years past. The pressure is on employers to educate their staff through formal training sessions, open office hours, a dedicated email address to field questions, and many other methods.
There are many more implications to the new tax laws outside of payroll withholding. Reports indicate there will be three main benefits for smaller businesses: lower tax rates, an additional deduction for pass-through entities, and an expansion of Section 179 which allows for the expensing of business-related equipment. However, these are complicated benefits that may or may not apply to your organization. CNN reports that the pass-through deduction can be especially confusing, and that businesses should proceed carefully.
Finally, there are certain elements to 2018 tax laws that can negatively impact your bottom line. A number of common deductions are going away, such as deductions for moving expenses, onsite gyms, meals, education savings plans, travel costs, membership dues, and more. That means employers will be faced with either absorbing these costs so employees don’t notice a difference, eliminating perks, or passing the cost to employees. While none of these options are ideal, they are the reality that today’s businesses face in the wake of significant tax reform.
For small and medium companies looking to make sense of tax reform, there is simply too much to unravel, understand, and express to employees. The risk of making a mistake is too high, which is why major publications like Entrepreneur urge organizations to seek outside help. Once you have the right partner at your side shouldering this burden, your company will make the most of new tax law benefits and you can focus your attention on core business goals and priorities.