Politics and your take on the recently passed tax plan aside, the reform package passed late last year will have some definite repercussions for small businesses in Arizona. But it may not be what you think. Due to a largely unforeseen technicality, many employees checking their pay stubs to see all of their tax savings this month may instead find that their paychecks are completely inaccurate.
Weird Tax Plan Consequences for Small Businesses in Arizona
Nothing can create a headache for a small business owner quite so quickly and intensely as an inaccuracy in bookkeeping or payroll. But if one thing is certain in that realm, knowing that something is wrong is a gazillion times easier to deal with if you are aware of it sooner rather than later. This is why we are advising all of our partners to have their employees double check that their pay stub looks right this month. But what makes this month so special?
GOP Tax Plan in a Nutshell
In addition to cuts to corporate tax rates and new deductions, most individuals and families will also pay fewer taxes. From lower overall tax rates to expanded deductions, most people are understandably excited about having more money in their pockets. The bulk of tax savings for individuals and families will be phased out in 2026, but for now, it is a great time for bank accounts everywhere.
Specific expanded deductions for businesses and lower corporate tax rates have left companies making big plans for how the influx of cash will impact their business strategies. While you have likely been planning for business tax updates going into effect in 2018 from a top-level profit/loss angle, very few people looked down the road to some of the technical realities of implementing the tax reform and how they could be impact by such a quick passage would mean.
While Congress was busy working out the nitty gritty of all that would go into the tax bill, they were left negotiating until seemingly the last minute. And with President Trump so eager to sign the bill into law before the holiday season, the race was on. But in all of the commotion, the IRS did not have time to update the W-4 form we all fill out to determine how much money should be withheld from our regular paychecks for taxes.
Some employees will not have enough money withheld from their paychecks while most will have way too much taken out. And it is probably safe to assume that those employees enjoying more money in their pockets by mistake now will be less than thrilled when it is time to visit with their tax accountants next spring and they find out they owe the IRS more money than they anticipated. And as far as good surprises at the accountant’s office go, finding out the IRS owes you money can be pretty great. Unless you have been struggling to live paycheck to paycheck like most Americans, had new expenses over the year or delayed making important investments. Depending on the nature of your company and the lifestyles of your employees, this could be a very big deal.
What should we do if paychecks are incorrect?
Well, the IRS will not have the new W-4 form ready for the 2018 tax year, so it will take some effort. Hopefully employers have some accounting and HR resources that can help employees have a better understanding of what is happening with their money. The IRS should be launching a new online calculator by the end of February that will help people determine their approximate tax liability.
In the meantime, anyone can estimate their tax liability themselves by using tables and other resources. To determine about how much should be withheld, find the approximate total tax liability for the year and divide by the number of pay periods in a year. If it turns out that the amount withheld is actually sort of close to what it should be, breathe easy and just make note of the slight discrepancy. If the amount withheld from your paycheck is not accurate at all, adjust your W-4 form as soon as possible. If deciding which deductions to take/not take, you can be on the safe side by selecting zero deductions and instead writing out the exact amount that should be withheld from taxes.
If you are an individual who stumbled across this blog, we hope it is helpful and that you can confidently get your withholding figured out. And to all of the employers reading this, score some major points with your team by setting up a time for everyone to sit down individually with a qualified person in your employ. Or enlist the help of an outside tax professional! Not sure who to turn to? If you are a small business in Arizona, give us a call! We know HR, payroll and tax accounting like the backs of our hands. We would be more than happy to schedule a time to coach any of your employees who are concerned about this issue and put everyone’s minds at ease.