Payroll Withholding and the Economy

April 2018

We’re now three monthly paychecks into 2018 having just received pay stubs for March. Much press has centered around employee tax withholding since the new tax legislation passed in November.  The bug question is whether or not employees will correctly withholding for their tax obligation due April, 2019. If employees find their withholding rates are inaccurate, it will be incumbent on the employees to tell their employers to make corrections. Having just reviewed my paycheck I found my federal withholding rate materially lower than in previous years. I’m guessing this significant and potential issue goes unnoticed by many employees.  In short, tax planning this year will be critical given all the changes.

In the past Americans have generally adopted a more conservative approach to their tax obligations by over withholding throughout the year and thus receiving a tax refund. Typically, 76 percent of Americans who filed received a tax refund rather than owing the IRS in April. The IRS is predicting the level might fall to around 73 percent as a result of the new legislation, but I’m guessing things might be different this year as many of the previous assumptions about withholding rates have changed. In fact, it was only recently that the IRS provided employers with new withholding guidelines and new W-4 forms for employees.

The IRS is also providing an online workbook for tax fliers to estimate their withholding. Filers with simple tax situations are likely to get accurate paychecks, but many Americans, including those who tend to itemize their tax returns, will need to use the online tool to ensure they are not dramatically overpaying or underpaying for their taxes.  The IRS and Treasury Department officials are encouraging tax filers to proactively use the new tax calculator to help them determine whether their paychecks are accurate.

Correct withholding and take home pay could be a big driver in personal consumption trends for 2018 as the new tax laws were designed to stimulate growth.  In fact, it was reported last Wednesday that Q4, 2017 real gross domestic product (GDP) increased at an annual rate of 2.9 percent. Analysts had expected a 2.7% increase after initial reports of 2.5%. In the third quarter, real GDP increased 3.2 percent. Personal consumption played a big part of the increase and many economists cited the stimulative tax cuts as reasons for positive consumer sentiment.

While these fourth quarter real GDP reports were very favorable more recent trends in January and February for personal income, savings and expenditures suggest a more tepid consumer more apt to save then spend. As such, economists have lowered their first quarter of real GDP estimates to 1.5%.

In short, there are several takeaways from this news.  First, in 2018 its real important to sit down with your accountant and review how the new legislation will impact your situation.  If your situation is simple and your income mostly dependent on W-2 wage income, then the IRS online workbook might be helpful.  In the many conversations we’ve had this year with CPAs the common answer to how the new tax laws impact families is a resounding “it depends”.  Accountants say, “there are so many variables that could positively or negatively impact a tax payer and scenarios are endless”.  Second, only time will tell how the consumer will behave once they find their paychecks have more disposable income as almost 80% of the economy is consumption driven.

Nicholas Hoffman & Co.

Spring is in the Air

spring in air

April 16, 2017

Spring is in the air in Georgia. The azaleas were on brilliant display last weekend at the Masters tournament in Augusta. Everything is coated with a light dusting of pollen. And we are scrambling to collect and distribute all the last minute tax documents. It happens this time every year like clockwork. And just as the tax season draws to a close, earnings season is just beginning.

Earnings season refers to the several weeks long period after the end of each quarter when publicly traded companies report their financial results. Analysts follow these events closely, looking for insight on the past performance and future prospects of the companies they follow. The stock price of a company may fluctuate significantly around its earnings announcement. If a company announces better earnings or revenue results than the market is expecting, the stock price may jump up. If a company misses earnings or revenue projections, the stock price may decline sharply. Analysts will also be listening for forward guidance: is the company’s outlook better, worse, or about the same as it was at the last earnings release? All these factors make earnings season an exciting time for investors.

For the past few years earnings growth has not been very impressive. In fact, last quarter the S&P 500 earned slightly less than it did in Q3 of 2014. Over the past twelve quarters or so earnings growth has been relatively flat while the market has continued to advance in price. But Spring is in the air for earnings too, and it looks like earnings growth may finally be accelerating.

Analysts are currently projecting 17% earnings growth, and 7.4% revenue growth, for the S&P 500 in aggregate for Q1 2018. All eleven sectors are expected to report positive earnings growth for the quarter. 26 companies have reported so far and we get another 60 reports this week. If companies deliver on these expectations, and we achieve 17% growth or better, it will be the strongest quarter for earnings growth since 2011.

How the market responds is anyone’s guess. Will we get April showers or May flowers? Only time will tell. When analysts have high expectations, it raises the bar for reporting companies and it can increase the likelihood of disappointments. If companies beat the raised expectations (and early indications are very positive) it can boost investor confidence and provide fuel for a continuing advance.

Markets are always forward looking so we will be listening with great interest to hear what management teams are emphasizing in the Spring earnings season.

Mike Masters