As readers know, the new Tax Act reduces individuals’ rates, repeals the personal exemption, and increases the standard deduction, which will require employers to change their tax withholding procedures. Today, the IRS released Notice 1036, which updates the income-tax withholding tables for 2018 reflecting changes made by the tax reform legislation enacted last month.

  • Over $1 million dollars: Current law requires an employer that makes supplemental wage payments (e.g., equity award vesting, annual bonus payments, etc.) to an employee in excess of $1 million during a calendar year to withhold on the amount above $1 million (or on the entire payment) at a rate equal to the highest individual income tax bracket in effect for the year. In 2017, this flat rate was 39.6%. The new tax reform lowers the top marginal tax rate to 37%, effective January 1, 2018. Therefore, employers should reduce withholding on these individuals to account for this change.
  • Less than $1 million dollars:
    • Supplemental rate: For supplemental wage payments to an employee for less than $1 million in a calendar year, employers may withhold at the supplemental flat rate, which is currently set at 25%. The new IRS guidance reduces that rate to 22%. The employer can choose to use the supplemental rate or the W-4 method, although the employee often makes a request.
    • W-4 method: Because of the increase to the standard deduction and the change to the tax rates, if an employer chooses to use the W-4 method, it should use the new tax tables provided in Notice 1036.

Note that in addition to complying with the Internal Revenue Code, you should make sure that your company’s withholding practices comply with your plan document, which typically provides language on required withholding in order to avoid matters arising under ASC 718.

According to the IRS, employers should begin using the 2018 withholding tables as soon as possible, but not later than February 15, 2018. Employers should continue to use the 2017 withholding tables until they have implemented the 2018 withholding tables. The new withholding tables are designed to work with the Forms W-4 that executives and employees have already filed with their employer to claim withholding allowances. Executives and employees do not have to do anything at this time.