WASHINGTON — If Republicans succeed in passing a tax overhaul by Christmas, the law could mean major changes for take-home pay — not all of them welcome.
But those changes probably won’t be reflected in paychecks in time for the New Year.
The American Payroll Association, whose members represent 17,000 employers, warned lawmakers Monday that they were creating a “herculean task” for companies and payroll service providers by leaving them such a short time to start implementing the new provisions, which would take effect on Jan. 1.
“Our members are already starting to panic, on behalf of themselves and millions of employees, about the effect on 2018 withholdings of a tax bill that will be effective a week after its enactment,” the APA said in a letter.
Late-year tax changes by Congress have become something of a holiday tradition in the past decade of partisan gridlock. But this year is different.
That’s because the tax overhaul would make fundamental changes to gauging how much tax should be withheld from paychecks so employees aren’t left with a big tax bill when filing federal returns.
The tax bill passed by the House and the one passed by the Senate would double the standard deduction and eliminate personal exemptions.
They also would change the income tax brackets and alter various family credits.
In addition, some of the once tax-free workplace benefits might become taxable wages.
And there may be changes to how much federal tax is automatically withheld on any bonus, commission or other “supplemental wages.”
They’ve been taxed at 25 percent since 2007, but that rate might go up to 28 percent under a new tax law, the APA said.
The changes in paychecks, though, won’t be immediate. Figure not until at least late January.
“It’s unlikely to be earlier,” said Mike O’Toole, a senior director at the American Payroll Association who co-wrote the letter.
Once a tax bill is enacted, the IRS has to review and incorporate all the changes into its new 2018 withholding tables, and issue guidance to payroll service managers on how to proceed.
From there, the changes must be programmed into payroll systems.
Big payroll service providers ADP and Paychex say that shouldn’t be too hard for them. But it might be slower going for employers that do their own payroll.
In the meantime, the IRS is likely to advise employers to continue using their 2017 withholding tables, O’Toole said.
But for everyone getting a paycheck — especially anyone who has dependents and normally takes a lot of deductions — there’s a huge question as to how to handle the number of allowances claimed on W-4 forms.
Those allowances help determine how much federal tax is withheld every pay period. But they currently are figured based on provisions in today’s law — many of which would either be eliminated or drastically changed in the GOP tax overhaul.
The W-4 form will need to be revamped, something the APA estimates might not happen until March.
And when it is, “we’re looking at the prospect of a new W-4 for every worker in America,” said Pete Isberg, head of government relations at ADP.