Last month you may have noticed your paycheck was higher than expected and, by now, you’ve decided A) it’s a mistake that hasn’t been fixed yet or B) something great is happening, and you sure hope it lasts. For 90 percent of U.S. employees, it’s the latter. In other words, don’t worry: It’s not a mistake!
The sudden increase in most employees’ take-home pay is thanks to the new tax laws that have gone into effect for 2018. By mid-February, the new income tax withholding laws were adopted by employers, which meant many W-4 employees had less of their income withheld for payroll taxes. According to the IRS, the revisions should help individual taxpayers avoid paying too much during the year and having to wait for a tax refund to get the money back.
Other tax changes the experts say employees and job seekers should plan for:
- There will soon be a new Form W-4 you’ll need to fill out. These forms will include the revised income tax withholdings and will reflect additional changes in the new law—such as changes in itemized deductions, increases in the child tax credit, the new dependent credit, and a repeal of dependent exemptions. Once your employer asks you to fill out the new form, put some thoughtful consideration into it to best optimize your tax breaks.
- Changes in corporate taxes that could trickle down to employees. The corporate tax rate was slashed from 35% to 21%, which translates into big savings for many employers. Some companies including AT&T and Southwest Airlines are turning that savings into bonuses, raises and increased 401(k) matching.
- Changes in business tax deductions that could translate into a few changes around the office, too. Fewer allowable deductions for certain employee meals, entertainment and transportation mean those expenses may be costlier for employers to cover. “Under the new law…entertainment is no longer deductible, and meals provided through an in-house cafeteria or for the convenience of the employer are subject to [a] 50 percent limitation,” says Dixon Hughes Goodman LLP’s Nathan Clark. He adds that “the new law…disallows a deduction for the expense of any qualified transportation fringe benefit provided to an employee of the taxpayer.” This can include reimbursements you might receive for travel between your residence and work, transit passes, and qualified parking.
- Job search deduction rules that have changed. If you were on the hunt for a job in 2017, be sure to look at the possible IRS deductions you might be able to take on your upcoming 2017 tax return. These deductions can include the cost to prepare and mail resumes and travel expenses (including meals and lodging), and some relocation costs. For 2018, however, these itemized job search expenses will no longer be deductible.
- Changes in self-employment taxes. If you perform any freelance/contract work or other side gigs that classify you as a W-9 independent contractor, your taxes have changed, too. Gone are most itemized deductions that included business expenses, but in their place is a potential 20% deduction for most self-employed individuals.
Consult a tax professional about how these changes may affect your income tax bill. And, for payroll tax questions for a current position, talk to your HR or payroll specialist. If you temp or contract through us, we’re happy to answer your questions about your paycheck increase. Isn’t it great?
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