Tuesday, July 25, 2017

Are You Withholding Enough from Your Employees’ Paychecks?

The Illinois budget impasse is resolved. After nearly two years without a budget, on July 6, 2017 the General Assembly passed its first budget since Governor Rauner was inaugurated. Of course, the price for the resolution of this impasse was the largest permanent income tax increase in Illinois history, with the individual tax rate increasing from 3.75% to 4.95%, and the corporate tax rate increasing from 5.25% to 7%*.

Although this income tax increase passed on July 6, it applies retroactively to July 1. This means that employers need to withhold not only 4.95% of their employees’ incomes from all paychecks issued after July 6, but also need to apply this increased withholding for any paychecks issued on between July 1 and July 5. The Illinois Department of Revenue has issued guidance on this, which you can access by clicking here. This guidance contains the tax rate tables that employers can use to calculate the amount that needs to be withheld from their employees’ paychecks in light of the increased tax rate. Some takeaways from this guidance that employers should note include:

  • Any taxes that were not withheld prior to the income tax increase can be prorated across future income tax withholdings for the rest of the fiscal year.
  • Employers can elect to calculate the amount of income tax they withhold by either “blending” the two different income tax rates together (i.e. averaging the two different income tax rates over the entire year) or treating the time before and after July 1 as essentially two separate fiscal years.
  • The formula to enter into an automated payroll calculator to calculate the amount to withhold is:

You can click here to access the withholding allowance worksheet, and click here for the Illinois Department of Revenue’s publications on the withholding of income tax payments and filing requirements. Properly calculating the amount of income tax to withhold can be difficult. Contact us for help.

*In addition to this 7% corporate income tax rate, Illinois charges corporations a 2.5% “Personal Property Replacement Tax.” So, the effective rate of state taxes on corporations is 9.5%.