Reminder: Additional Medicare Tax Effective January 1, 2013
The Additional Medicare Tax under section 9015 of the Patient Protection and Affordable Care Act takes effect January 1, 2013. Individuals will have to pay this 0.9 percent tax on any amounts that are both currently subject to the Medicare Tax and exceed certain thresholds. Employers, though not themselves responsible for paying the tax, must, to a certain extent, withhold it from employees’ wages.
The Additional Medicare Tax operates a bit differently from other payroll taxes. For example, employees pay the Social Security Tax only on those amounts that they receive from their employers that are below a certain threshold amount. So, in the year 2012, an employee paid this tax only on the first $106,800 received from his or her employer. By contrast, employees pay the Additional Medicare Tax only from those amounts they receive from their employers that are above certain threshold amounts.
Employees must pay the Additional Medicare Tax if their wages, or other compensation, exceeds the following threshold amount for their filing status:
- Married filing jointly: $250,000
- Married filing separately: $125,000
- Single: $200,000
- Head of household (with qualifying person): $200,000
- Qualifying widow(er) with dependent child: $200,000
Determining whether an amount an individual receives is subject to the Additional Medicare Tax is a fairly straightforward process: the amount is likely to be subject to the Additional Medicare Tax if it is subject to the regular Medicare Tax. Like the regular Medicare Tax, the Additional Medicare Tax applies to all payments for employment services, including the value of noncash payments such as taxable fringe benefits.
An amount is similarly likely to be subject to the Additional Medicare Tax at the same time it becomes subject to the regular Medicare Tax. For example, the special timing rules establishing when an individual’s nonqualified deferred compensation becomes subject to Medicare Tax also determine the time at which this compensation is subject to the Additional Medicare Tax.
Employers' Withholding Obligations
An employer must withhold the Additional Medicare Tax from payments it makes to an employee to the extent that these payments exceed $200,000 in a calendar year. This obligation applies regardless of the employee’s filing status. This means that if an employer has an employee that is married and files jointly — and thus has a $250,000 threshold — the employer still must withhold the Additional Medicare Tax from any amounts it pays the employee in excess of $200,000. Similarly, if the employee is married and files separately — and thus has a $125,000 threshold — the employer must withhold the Additional Medicare Tax only to the extent that the employee’s payments from the employer exceed $200,000. This will cause some employees to have too much, or too little, Additional Medicare Tax withheld from their wages. The IRS has, however, stated that it will allow employees to reconcile any over or under withholding on their individual income tax returns (Form 1040).
The following example illustrates this principle:
In calendar year 2014, Employer A pays Employee B $220,000 in wages. Employee B is married, and files a joint return. Her Additional Medicare Tax threshold is therefore $250,000. Employee B’s spouse, Employee C, receives $20,000 in wages. Employer A, as required, withholds the Additional Medicare Tax from Employee B’s wages to the extent that they exceed $200,000 — that is, $20,000. Employee B and Employee C are not, however, ultimately liable for the Additional Medicare Tax because their combined wages are only $240,000. The amount of Additional Medicare Tax that Employer A overwithheld from Employee B’s wages will be credited against the total tax liability shown on Employee B and Employee C’s income tax return.
Another feature distinguishing the Additional Medicare Tax from other payroll taxes is a fortunate one for employers: they don’t have to pay any of it. That is, an employer must “match” the amount of regular Medicare Tax that it withholds from an employee’s paycheck by paying an identical amount. The employer does not, however, have to “match” any amount that it withholds from an employee’s wages on account of the Additional Medicare Tax.
Employers are not required to start withholding the Additional Medicare Tax from an employee’s wages until the pay period in which the employee’s wages exceed $200,000. This means that, even if an employer anticipates that an employee’s wages will ultimately exceed $200,000 for a calendar year, the employer does not need to begin to withhold the Additional Medicare Tax from the employee’s wages until the pay period in which the employee’s wages in fact exceed $200,000.
Employers do not need to notify employees when they begin to withhold the Additional Medicare Tax.
Employee Performing Services for Multiple Subsidiaries
Some employers may wonder what their withholding obligations are with respect to employees who perform services for multiple subsidiaries of a single company — should the company determine its withholding obligations by combining all wages that the employee receives from all related subsidiaries, or is each subsidiary to independently withhold the tax from wages it pays an employee in excess of $200,000? The IRS has stated that, generally, the later is the case. That is, each subsidiary must determine its withholding obligations without considering any amounts that the employee receives from other related employers. The subsidiaries may, however, account for payments from other related employers if the payments are made by a “common paymaster.”
Employees Who Request Additional Withholding
Certain employees may want their employers to withhold more Additional Medicare Tax. Employees who, for example, are married but file separately may want their employers to do so because, although they are liable for the Additional Medicare Tax as soon as their wages exceed $125,000, their employers will not withhold the Additional Medicare Tax until their wages exceed $200,000. There is no way for these employees to specifically request their employers to withhold more Additional Medicare Tax from their wages. They may, nonetheless, request their employers to withhold an additional amount of income tax withholding on their Form W-4, which the IRS will then apply against all taxes shown on the individual’s income tax return — including any Additional Medicare Tax liability.
Revised IRS Forms
Any changes to payroll taxes, of course, require changes to IRS forms. The IRS has stated that it plans to release drafts of revised forms to reflect the new Additional Medi- care Tax, including Forms 941, 943, and the tax return schemas for the F94X series of returns. It has not, however, specified precisely when it will release those forms.
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© Pietzsch, Bonnett & Womack, P.A. The applicability of any legal principles discussed in this Client Advisory may differ substantially in specific situations, and the information contained herein is for general, informational purposes and should not be construed as specific legal advice. Readers should consult with their legal, financial, or other professional advisors concerning specific matters. Circular 230 Disclaimer: To ensure compliance with IRS rules regarding tax advice, any advice included in this Client Advisory is not intended, and cannot be used, for the purpose of (i) avoiding any federal tax penalty or (ii) promoting, marketing, or recommending any tax-related transaction or matter to another person. In addition, IRS Section 6694(a) disclosure may be required with respect to any tax advice contained in this Client Advisory. This Client Advisory may be attorney advertising.