In the Payroll Mailbag: April 2018

Does breakfast at Tiffany’s come with a watch?

Question: Our company presents employees with length-of-service awards in five-year increments. One of the choices is a restricted gift card to Tiffany’s. What are the payroll tax consequences of providing employees with a gift card, instead of a tangible item?

Answer: The Tax Cuts and Jobs Act (TCJA) clarifies that length-of-service awards can’t be cash, gift cards, vacations, meals, lodging, theater or sports tickets, stocks, bonds, other securities and other similar items. However, the conference report, which accompanied the legislation, builds in an exception to the gift-card rule, by noting that gift cards, gift coupons or gift certificates that only allow employees to select and receive tangible personal property from a limited array of items that have been preselected or preapproved by the employer would still qualify as tax-free length-of-service awards.

How do we handle withholding without personal exemptions?

Question: Based on what we know about the TCJA, personal exemptions no longer count when employees’ figure their income taxes. The problem is that our payroll software is set up to the use the number of allowances × $4,150 ÷ 26 (we pay biweekly), to figure employees’ withholding. Must we change how employees’ withholding is computed?

Answer: No. Suspending personal exemptions through 2025 is a complication, but the TCJA resolves this by substituting the phrase “withholding allowances” for personal exemptions. It is not included in that particular section of the law, but $4,150 (adjusted for inflation) is referenced in other withholding-related sections. It is anticipated that the IRS will continue to use it when devising the percentage method withholding tables for a particular year.