Federal Tax Reform

Federal tax reform continues to be a hot topic as many changes made by the Tax Cuts and Jobs Act (TCJA; Pub. L. 115-97) continue to impact payroll professionals. Although most of the changes in the TCJA took effect January 1, 2018, they will remain in effect through 2025.

Tax Rates and Brackets
The TCJA retains seven tax brackets, but adjusts tax rates and taxable income levels. The tax rates are also used to determine supplemental and backup withholding rates, so those rates also change. Prior to the TCJA, the tax rates in 2017 were 10%, 15%, 25%, 28%, 33%, 35%, and 39.6%. Beginning in 2018, the tax rates changed to 10%, 12%, 22%, 24%, 32%, 35%, and 37%. Here are the 2023 rates.

2023 Rates and Taxable Income

2023 Tax RateSingleMarried, Filing JointlyHead of Household
10%$0-$11,000$0 - $22,000$0 - $15,700
12%$11,001 - $44,725$22,001 - $89,450$15,701 - $59,850
22%$44,726 - $95,375$89,451 - $190,750$59,851 - $95,350
24%$95,376 - $182,100$190,751 - $364,200$95,351 - $182,100
32%$182,101 - $231,250$364,201 - $462,500$182,101 - $231,250
35%$231,251 - $578,125$462,501 - $693,750$231,251 - $578,100

Rates for Withholding on Supplemental Wages
There is a two-tiered system for withholding income tax from supplemental wages at a flat rate:

  • Optional flat rate: 22%. The optional flat tax rate on supplemental wages of up to $1 million in a taxable year is tied to a section of the Internal Revenue Code that is suspended for tax years 2018 through 2025 by the TCJA (§1(i)(2)). The rate is 22% (no other percentage allowed).
  • Mandatory flat rate: 37%. The TCJA lowers that rate to 37% for tax years 2018 through 2025.

Backup Withholding Rate
The TCJA lowers that rate to 24% for tax years 2018 through 2025.

Personal Exemption Elimination and Income Tax Withholding
The TCJA eliminates the personal exemption claimed by taxpayers for themselves and their spouse and dependents for 2018 through 2025. For 2023, the standard deduction is $27,700 for married individuals filing jointly, $20,800 for head-of-household filers, and $13,850 for all others.

Federal Tax Levies
The IRS issued the 2023 Publication 1494, Tables for Figuring Amount Exempt From Levy on Wages, Salary, and Other Income, on January 3, 2023. The TCJA altered the way the amount of wages, salary, or other income exempt from a federal tax levy is calculated. For taxable years beginning in 2023, the dollar amount used to calculate the amount determined under IRC §6334(d)(4)(B) is $4,700.

Other Areas Important to Payroll
The TCJA also affects other areas important to payroll professionals, including: the suspension of the fringe benefit for moving expenses (except for certain military-related moves); a new employer tax credit for paid family and medical leave; and how states are reacting to the TCJA. States are revising their employee withholding allowance certificates and changing which version of the Internal Revenue Code they follow.