This information is based on the statutes and guidance available as of the date of publication and is subject to change. 

Enacted tax reform has broad reach that will impact taxes on individuals and businesses. Most of the provisions are effective in 2018 and businesses will need to adjust for any changes to the taxable or nontaxable nature of certain benefits provided to their employees beginning with their first payroll in 2018. The tax reform law contains many provisions that could affect an employer’s treatment of certain employee benefits and wages. This publication outlines the items for which employers have options and for which decisions must be made early in 2018 due to the immediate effect on paychecks and payroll tax liabilities.

Tax Rates

The IRS has updated withholding tables to reflect new individual tax rates and deductions (https://www.irs.gov/pub/irs-pdf/n1036.pdf).  Employers should use the new tables with the next pay period and no later than February 15, 2018.  The IRS did caution that the tables may need further refinement and could change during the year.  These tables are designed to work with existing W-4 forms, so employers do not need to request new W-4 forms from employees.

Change in Treatment of certain Fringe Benefits

Qualified Transportation Fringe Benefit

Effective January 1, 2018, the new law repeals the deduction previously available to businesses that provide commuting fringe benefits to employees unless the benefit is provided for the safety of the employee. Many businesses have historically provided transit passes, parking, bicycle commuting reimbursement or other qualified transportation tax-free to their employees while claiming a business deduction, as allowed under prior law. As of January 1, 2018, the deduction for these items is no longer available to employers.

For some employers, eliminating any qualified transportation benefit is not an option due to mandated local laws (e.g. New York, D.C., San Francisco and others). For employers not required to provide this benefit, rather than completely eliminating the benefit or forgoing the business deductions, employers may want to consider establishing an employer-sponsored salary deduction program for transportation expenses. Similar to employee life insurance, 401(k) or other pretax programs, this would enable employees to pay for transportation expenses through payroll deductions using pretax income. While this option does not provide the same benefit as before tax-reform, this would still enable employees to offset some of their commuting costs with the tax benefit. 

  • ACTION ITEM:  Businesses should determine if they want to continue providing transportation fringe benefits to their employees or change to an employer-sponsored salary deduction program in light of the elimination of the deduction. For parking benefits, businesses may want to negotiate leasing arrangements that provide for free parking that can be passed along to employees.

Moving Expenses

Under prior law, an employer could pay or reimburse moving expenses to an employee and deduct this cost from taxable income while treating the benefit as nontaxable to the employee. Tax reform now requires that employer-provided moving expenses are taxable wages to the employee and non-deductible by the employer.

Employee Achievement Awards

The new law provides that any award made to employees for achievement, length of service or safety must be includible in the employee’s taxable income beginning in 2018. Additionally, employers can no longer deduct the value of the award as a business expense unless the award is tangible property other than cash, cash equivalents, vacation or similar perks.

Employers that provide these types of awards will need to establish procedures to account for the value of the award in an employee’s taxable income and track any non-deductible costs in a general ledger account separate from the deductible costs.

Limitation of $1 Million Deduction for Executive Compensation is Expanded

Prior tax law limited deductions for certain executive compensation to $1 million with an exclusion for certain performance-based compensation. Tax reform has broadened the companies subject to this limitation to include any issuer of securities as defined in section 3 of the Exchange Act, even if they are not listed on an exchange. This change means that foreign companies publicly traded through ADRs, all domestic publicly-traded companies, and large private C or S corporations could be subject to this limitation. This change will not apply to any written binding contracts in effect on November 2, 2017, but any new contracts entered into for tax years beginning after December 31, 2017 are subject to this change. 

  • ACTION ITEM:  Businesses in the U.S. with stock trading on ADRs or large private corporations with performance-based stock option compensation programs for executives need to determine the effect of this change on any new agreements and consider alternate compensation arrangements.

New Penalty for Failure to Notify Employees of §83 Elections

Employers providing qualified stock option plans to employees must provide notice to the employee that the option would be includible in the employee’s gross income if not for the §83(i) election. The amount of the penalty is $100 per failure, up to a maximum of $50,000 during a calendar year, effective for failures after December 31, 2017. In addition, employers will find that W-2 reporting for 2018 will have new information required for §83(i) elections taken by employees. 

  • ACTION ITEM:  Employers with stock option arrangements should determine required notices and provide to employees beginning in 2018.