Due to the removal of popular deductions, many taxpayers in 2019 face reduced refunds or no refunds. The impact on your employees may affect your organization in surprising ways.
From what has been reported, the IRS is behind in processing tax returns this year. With the tax reform and the recent government shutdown, we’re seeing delays and complications affecting thousands of U.S. taxpayers.
This was the biggest tax reform in over 30 years. As part of the overhaul many organizations reduced the amount of federal taxes withheld from employees’ paychecks. Most people saw a slight increase in their paychecks throughout the year, which means tax refunds will be reduced or absent.
For many the tax refund is one of the largest financial events of the year, and a lot of people count on it. As of February 11, tax refunds were down 8.4 percent. Quite a few people are voicing their displeasure on Twitter and other social media platforms.
The three main causes of reduced tax refunds are
- Paycheck withholding changes
- Eliminated miscellaneous deductions
- Caps on state and local taxes
Ultimately these changes may increase taxable income and as a result your tax bill. For employers across the country, this change has significant ramifications because some employees are going to look for ways to recoup their tax refund loss—and it could come at the expense of their employer. The tax reform remains in place through 2025, so now is the time to take measures to protect your organization.
How reduced tax refunds will impact employers
There are two main areas where employees’ reduced tax refunds could impact their employers: company risk and employee retention.
- Increased company risk
The elimination of the unreimbursed business expense deduction will have an immediate impact. Under the old tax code, an employee receiving a car allowance could deduct business mileage. Under the new tax code, no one can deduct mileage, even if they can prove that their vehicle allowance or mileage reimbursement leaves some business expenses unreimbursed.
Company risk will now increase as employees experience shortfalls and seek to recoup unreimbursed business expenses under labor laws in employee friendly states. This will especially be true for employees who receive a car allowance and previously deducted mileage to make their car reimbursement whole.
If you have employees operating in the following jurisdictions, you need to pay particular attention to the possibility of lawsuits under state labor codes: California, Illinois, Iowa, Massachusetts, Michigan, Montana, New Hampshire, New York, North Dakota, South Dakota, Washington, D.C. Other states may follow suit in response to the tax reform.
- Decreased employee retention
Employee retention may also take a hit if your organization does not respond appropriately to the new tax landscape. Companies that take steps to ensure full reimbursement of employee business expenses will have an advantage over companies that do not. Similarly, companies that switch from a taxable car allowance to a non-taxable vehicle reimbursement program will also gain an advantage over companies that continue to pay a taxable allowance.
Because a standard employee car allowance is a taxable benefit under IRS guidelines, withholding reduces the monthly payment significantly. This often leaves a gap between actual vehicle expenses and the monthly benefit. Without the ability to close that gap by deducting business mileage, employees receiving a car allowance will want to offset that reduced tax refund—and they may do it by finding an employer who pays a non-taxable reimbursement.
Steps to reduce the tax reform impact
There are several ways your organization can lessen the impact of the tax reform on your employees.
- Eliminate tax waste from your car allowance policy
If you have employees receiving a taxable car allowance, change your plan immediately to an IRS-accountable plan (i.e. a non-taxable plan).
The employees receiving a car allowance typically drive growth (i.e. sales and service employees). These employees rely on their allowance and the tax deductions that were eliminated. The last thing you want these employees doing is focusing on what the tax reform is costing them.
Stop paying the taxable allowance. Today. You are throwing money away that could go to your employees to help offset the costs of owning/operating their personal vehicle for business. Between federal and state income taxes and FICA/Medicare, these employees often lose 30–40 % of their car allowance. By switching to an IRS-accountable plan, you can leverage that 30–40 % into a boost that will offset any loss of tax refund. Remember, these employees cannot write off their unreimbursed business expenses or deduct mileage anymore.
- Rewrite your vehicle reimbursement policy
Whether you pay a taxable car allowance or a non-taxable plan such as a mileage reimbursement, make sure to rewrite your policy in light of state indemnification labor codes.
These labor codes stipulate that employees must be fully reimbursed for the use of a personal vehicle for work (as well as other personal items used for work such as phones, laptops, data plans, etc.). You should fully review your current policy to do the following:
- Fully reimburse employee expenses in a transparent, defensible way
- Clarify in writing what expenses are reimbursable and to what degree
- How an employee can demonstrate that an expense should be reimbursed
You want your management to be the ones working with employees on ensuring sufficient reimbursement—not the courts. If you have written procedures that satisfy state requirements, you will greatly reduce company risk.
- Have employees adjust their withholding for 2019
Make sure that, whatever you do, employees’ current withholding reflects the new tax landscape and reduces the chance of an unpleasant surprise during next year’s tax season.
It’s still early in the tax season; we will keep you posted with more updates each month through April.
In the meantime, if you would like information on how much you could save by switching to a non-taxable car allowance or would like guidance on conducting a thorough reimbursement policy review, contact mBurse today.