Arkansas residents, this one’s for you. Governor Hutchinson recently signed legislation to immediately lower the state’s top individual tax rate and provide tax credits to low- and middle-income taxpayers. And as an employer, you need to know how these changes impact your payroll withholding. Read on about this recent Arkansas inflation relief.

What is the Arkansas inflation relief?

In August 2022, the state of Arkansas passed legislation to immediately implement a tax relief package to help combat inflation. 

This Arkansas inflation relief provides for several tax measures, including:

1. A reduction in the top individual income tax rate
2. An inflationary relief income tax credit 

Here’s a closer look at the new Arkansas tax cut and what it means for Arkansas residents.

1. Individual income tax rate reduction

The Arkansas inflation relief legislation drops the top state individual income tax rate to 4.9%, down from 5.5%. This 4.9% top rate is the lowest in the state’s history. 

Great! But what exactly does this mean to individual taxpayers at a dollar level? According to the state of Arkansas, individuals with a net taxable income of $50,000 will save $482 on their tax bill compared to the previous year. 

Because of the tax cuts, Arkansas released an updated withholding formula for state income tax withholding. (Employers, are you listening? If not, no worries—we’ll get into what you need to do later.)

2. Inflationary relief income tax credit 

In addition to cutting the top state individual income tax rate, Arkansas also announced an income tax credit for low- and middle-income taxpayers. Individuals can claim this tax credit on their individual tax returns.

So, who qualifies? The nonrefundable tax credit is worth up to $150 for individual taxpayers. Those with net incomes up to $87,000 are eligible for the full tax credit. The tax credit amount gradually decreases for those who make more than $87,000 and up to $101,000. Individuals with net incomes of $101,001 or more are not eligible for a tax credit. 

For individuals filing jointly, the maximum tax credit is $300 jointly for couples who make up to $174,000. Again, the tax credit amount gradually decreases for couples who make more than $174,000 and up to $202,000. Those with joint net incomes of $202,001 or more are not eligible for the tax credit. 

What do Arkansas employers need to do?

As an employer, you’re responsible for withholding federal, state, and local income taxes from employee wages. So, how does the new Arkansas inflation relief impact your payroll process? 

The recent legislation lowered the top state individual income tax rate. This adjusted the income tax brackets. So as an Arkansas employer, you must adjust your state income tax withholding to reflect these changes. 

You may be able to use the Department of Finance and Administration’s updated withholding tax formula method, effective October 1, 2022.

If you use payroll software, your provider should automatically adjust Arkansas state income tax calculations for you (hooray!). 

The new tax rate applies to all employee net income earned in 2022. However, you’re not responsible for making adjustments retroactively. Simply begin withholding using the new state income tax rates through the end of the year. Your employees can receive the difference when they file their individual tax returns. 

You’re not crazy. Tax rates change all the time. But with Patriot’s payroll software, you can rest assured that your calculations are correct. Enjoy automatic tax updates directly in the software—no downloads or updates necessary. Get your free trial today! 

This is not intended as legal advice; for more information, please click here.