By Barry Waldman
If an employee of an S.C.-based company earns $1,000 per week and claims two exemptions, the employee’s biweekly S.C. withholding tax is $108.
Starting next year, the first update in the state’s withholding table in 25 years will reduce that to $107.
The change will cut the employee’s state tax refund at the end of the year by $26.
If that seems like a minuscule change, consider what will happen when the state continues to update the tax withholding table for the next nine years after that.
The S.C. Department of Revenue expects to slash the average year-end refund, now roughly $900, in half. That will translate to about $1 billion that the state will cease collecting over the course of the year only to mail back in the first few months of the following year.
“It’s certainly long overdue,” said Bryan Buzon, owner of Escalon Business Solutions, a Mount Pleasant-based payroll company.
It will smooth out the state’s revenue collection and make budgeting easier, said Bonnie Swingle, public information director for the Revenue Department.
Swingle said the state is starting with baby steps, so that filers hardly notice the difference. Subsequent updates will be larger, but still barely noticeable. The federal government updates its tax tables every year, and other changes in withholding — pay increases and health care premiums, for example — are likely to far exceed state adjustments.
The new withholding table has been in the works since 2015, and the Department of Revenue has been releasing information about it all year. The new withholding tables, which go into effect in 2017, came out in August, giving software developers plenty of time to make updates.
“If they work with other states, they’re used to this,” Swingle said.
New tax tables for 2017 can be found at the department’s website, at http://dor.sc.gov/withholding.
Accompanying the change in the tax table is a new requirement for releasing year-end wage records, also known as W-2 forms. Previously due to the Department of Revenue at the end of February, the W-2 will be due at the end of January starting in 2017.
That switch required action by the state Legislature and the signature of the governor. It coincides with the date employers are required to provide W-2s to employees.
David Kuczkir, a Daniel Island-based CPA, says employers who do payroll in-house should begin their year-end preparations now.
“Should they miss the deadline, employers face penalties for noncompliance — $250 for a single incorrect return and $500 for intentionally failing to file a return,” he said.
In addition, Kuczkir said, “Employers should definitely contact their tax software provider to ensure the software is compliant. Even if they use a service, like QuickBooks, they should call the service and check that it is cognizant of the new South Carolina withholding tables.”
The S.C. Revenue Department is hoping for widespread compliance since the changes have been broadly publicized and because Revenue Department Director Rick Reams reached out to large payroll providers, online software companies and municipalities in the state to ensure their cooperation.
Swingle said those who fail to file their W-2s on time or use the wrong withholding table next year will not face a penalty as the Department of Revenue phases in the changes.
Besides the issues over-withholding creates with budgeting, the state said generating refunds and mailing them creates unnecessary administrative costs. In addition, large refund checks invite tax refund fraud, a growing problem across the country.
The IRS estimates that $21 billion was lost to federal tax refund fraud in 2016, more than three times the previous year’s total.
The state Revenue Department said it has no data on the extent of tax refund fraud in South Carolina, but it delayed issuing refunds in 2016 to reduce scams.
The state said then that it was using predictive analytic software and other measures to find likely cases.
By requiring W-2s to be sent to the state at the same time they are provided to employees, the Department of Revenue avoids situations in which taxpayers file for refunds before the agency has their W-2s.
Buzon, the payroll provider, said it’s a seamless change for businesses like his and for large employers with their own payroll departments.
“Our technology updates the tax tables automatically every year,” he said.
Swingle, of the S.C. Department of Revenue, said none of this will have any impact on quarterly business filers.
“I always tell clients the best tax scenario is to be owed zero or very little, relatively speaking,” Kuczkir said. “By overpaying your taxes, you’re essentially loaning the government money interest-free.”