New IRS withholding tables mean a bigger paycheck for 2018

There’s nothing better to start a new year than a bigger paycheck.

No, I’m not talking about a raise or a bonus.

I’m talking about the newly updated IRS withholding tables. Your employer uses these bad boys to make sure you’re paying the right amount in taxes. The recent tax reform legislation enacted major changes to taxes. There were changes to tax brackets and deductions and in general meant lower taxes for most people.

These tables are a key component of that reduction as they push those benefits through to tax payers immediately. The idea is that since taxes are now lower then the amount that needs to be deducted from your paycheck is lower.

It’s likely that your first paycheck in 2018 didn’t look much different than your last one in 2017 in terms of federal taxes. That’s because your employer was still using the 2017 tables which reflected the old 2017 tax rates. These new tables, released on January 11th give them proper guidance on what to withhold based on the new lower tax rates. Employers should use these tables ASAP. That means it’s possible that the benefits of a lower tax rate will show up in your next paycheck! That’s only if your payroll department is efficient but if not then there’s a hard deadline of February 15th. After that, the extra cash will be in there for the rest of the year.

I’m no accountant but I still wanted to see the impact of these new tables on various income levels. I looked through the 2017 tables and the 2018 tables to figure out the difference a person will see in their paycheck. The difference varies by income level as tax brackets changed quite a bit. First, let’s take a look at the changes for those of us who aren’t married. I did this analysis for a bi-weekly pay schedule but the IRS notice does include tables for other pay period types.

Single withholding comparison

single taxes

The results are a pretty clear benefit to all income brackets. Most single filers will see a 1.5-3% boost to their biweekly paycheck.

The dollar totals differ depending on your taxable wages. There isn’t one income bracket that is worse off this year. Remember, these are bi-weekly paychecks so these are not immaterial adjustments. Someone earning 60k/yr will take home around $1800 more this year versus last year.

Note, that there is a sizable drop off in benefit starting in the higher income brackets.

The reason for that is that the single tax rate actually goes up for certain income ranges versus what was seen in 2017.

For example, the 28% bracket in 2017 covered $91,901 to $191,650 in earnings and the 33% bracket covered past that until $416,700. Now in 2018, income from $157,501-$200,000 is taxed at 32% and $200,000 to $500,000 is taxed at 35%. That means that people who have earnings taxed in the 150k-400k range are worse off in those brackets than they were before. Their overall taxes will go down due to the benefits they get in the lower brackets but the impact of tax reform is far more muted. The tax benefit returns after 400k as well so it only really impacts the people that are heavily clustered within those income ranges.

It’s a weird quirk of these single tax brackets. This “punishment” of those income brackets doesn’t exist when filling jointly which is interesting. Let’s see how those look.

Family withholding comparison

family taxes

There’s a much bigger benefit to those filing jointly from this tax plan. That’s especially true for those with higher incomes.

Almost every income range falls into a lower tax bracket here and some have a big disparity versus 2017. A good portion of the income earned in the old 33% bracket now rests in the 24% bracket(this has a huge impact with earnings in the 150-350k range). There are also no odd income brackets like we saw with single filers. That means that certain income ranges benefit more than a single filer. It certainly helps to be married if you’re a high earner with this new bracket.

The benefits here are different than for single filers where the benefit is clustered near the lower incomes. Here’s the biggest benefit is seen as you go up in income due to the way these tax brackets work.

The good news is that everyone should feel a boost in their paycheck once these new tables are put into effect. All income brackets benefit and all people should see a boost whether they’re single or married filers.

Bigger paychecks for everyone!

Taxes are never simple but the simple answer is that most should see an increase in their paycheck. That means that even if you have no raise this year, your take home pay should increase a few percent.

The tax benefit is coming and it’s coming soon. It may appear in your next paycheck and it’ll definitely appear before February 15th. Most people will see a 1-4% boost in their take home pay assuming all else is equal. You can estimate what you’ll likely see by the tables above but an extra $1,800 on 60k in taxable income will go a long way for some families. It can help establish an emergency fund, help with expenses or boost your savings rate. I personally plan to use the extra funds to pay off my car loan faster and/or save a bit more. How about you?

Remember, this is just what your employer withholds from your paycheck. It may not cover all your tax liabilities if you have other income or investments. It may not also mean you’re definitely better off this year than you were last year. That’s especially true if you took more than the standard deduction in 2017 and are limited by what you can do there this year. This may be common in households with high state and property taxes.

The above, however, should be a good estimate for most people. That means you can look forward to a higher paycheck as soon as your employer implements the new tables.

Mine already has and the extra dollars are certainly appreciated!

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11 thoughts on “New IRS withholding tables mean a bigger paycheck for 2018

    1. It’s possible that we’ll see much bigger increases than average in some of the industries that really benefit from the tax law.

    1. Extra dividends and buybacks would be good as well as investments in the business in general to help grow future earnings.

    1. That’s a bummer although I’ve heard some states are trying to get around some of the punishing deduction maximums that the law imposes.

  1. Not sure what the tax implications will be for my paycheck. But, to the extent I’ll be getting more money in my paycheck, I’m all for it. Also not sure if I’ll be itemizing my deductions. I have a house, but they doubled the standard deduction, so it may not make sense to itemize. We will see. Thanks for sharing this info.

  2. Since I didn’t itemize last year that part won’t effect me. I would like to see more money each week which would increase my savings rate. Even better would be large increases in the dividends. I don’t much care for the share buybacks. Only time will tell how good this tax reform will really be. Thanks for sharing this TITM!

  3. Good info … I’ll have to double check the withholding on Social Security as I use the withholding to avoid quarterly estimates (investment income). Since I probably lose the itemization capability I expect to hit a higher bracket with the tax ‘cut’ raising my tax bill. I don’t want to also face penalties for under withholding as well. My best case scenario is a 3% hike, worst case about 15% increase.

  4. I saw the extra $$$ due to the federal tax reduction show up in my bi-weekly paycheck this week. Your numbers outlined it well, TITM. While I’ll probably make use of some of the additional income immediately, I’ll probably save most of it, waiting until I can determine the full tax impact when filing my 2018 return. Thanks for the post!

  5. Definitely nice to have the extra money on my paycheck. The tables above are really interesting, I’m not sure if I’ve seen them before.

    Only time will tell if these changes to the tax law will be overall positive or negative. I worry about the impact on the increasing deficit.

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