On December 22, President Trump signed H.R. 1, also known as the Tax Cuts and Jobs Act, into law. The legislation, which marks the most sweeping tax changes in 30 years, will affect payroll professionals by changing the taxability of two fringe benefits and affecting income tax withholding in 2018 and beyond. Because this tax legislation was passed so late in 2017, the IRS will not issue withholding guidance for 2018 until January.

Fringe benefit changes

Qualified moving expenses. Through 2017, the Internal Revenue Code provides an exclusion from employees’ income for qualified moving expense payments and reimbursements made by employers. This fringe benefit will be suspended, except for military-related moving expenses, for tax years 2018 through 2025.

Qualified bicycle commuting costs. Through 2017, there is a qualified transportation fringe benefit for bicycle commuters that allows an employer to exclude up to $20 per month for reimbursements of bicycle commuting costs. This fringe benefit also will be suspended for tax years 2018 through 2025.

Clarification on employee achievement awards. The legislation adds a definition of “tangible personal property” to the requirements for an employee length-of-service or safety achievement award to qualify for an income exclusion. Under the new definition, cash, cash equivalents, and gift cards are specifically included among the types of items that do not qualify as tangible personal property. This provision is effective beginning in 2018. The Conference Report that explains the legislation notes that this is not a change from present law.

Affordable Care Act (ACA)

This legislation does not change the obligation of applicable large employers to offer ACA-compliant insurance to their full-time employees and to report on the offer. However, it does effectively eliminate the individual mandate by reducing the penalty for not purchasing insurance to zero beginning in tax years after December 31, 2018.

Supplemental and backup withholding rates

Supplemental rate for wages exceeding $1 million. The mandatory withholding rate on supplemental wages exceeding $1 million is tied to the highest income tax rate. For 2017, the rate is 39.6%. The legislation lowers that rate to 37% for tax years 2018 through 2025.

Supplemental rate for wages up to $1 million. Because the tax rate on supplemental wages of up to $1 million is tied to a section of the Internal Revenue Code that is suspended for tax years 2018 through 2025 by the tax reform legislation (§1(i)(2)), it appears that the withholding rate will increase to 28% (from 25%) for those years, but the IRS has not yet confirmed the new rate.

Backup withholding rate. The backup withholding rate is tied to the fourth lowest tax rate. For 2017 the rate is 28%. The legislation lowers that rate to 24% for tax years 2018 through 2025.

Delayed guidance for 2018

In a statement posted to its website on December 13, the IRS stated that it was “closely monitoring” the legislation and was “taking the initial steps to prepare guidance on withholding for 2018.” The IRS also said that it expects to issue “the initial withholding guidance (Notice 1036) in January reflecting the new legislation, which would allow taxpayers to begin seeing the benefits of the change as early as February.”