NEW MEDICARE TAX UNDER THE HEALTHCARE REFORM LAW
The Patient Protection and Affordable Care Act (“the Act”) contains tax
increases that will go into effect for tax years beginning after December 31,
2012. One such tax is an additional hospital insurance tax (“Additional
Medicare Tax”) for higher-earning self-employed and working taxpayers. Recently,
the IRS released guidance containing some frequently asked questions and
answers that provide affected employers with the information necessary to meet
new withholding requirements.
Additional Medicare Tax Liability
Under the Act, an individual is subject to an Additional Medicare Tax
of 0.9% if his or her wages, other compensation, and/or self-employment income (together
with those of a spouse, if filing a joint return) exceed the following
threshold amounts based on the individual’s or couple’s federal income tax filing
status:
Filing Status Wage
Threshold
Married, jointly $250,000
Married, separately $125,000
Single $200,000
Head of Household* $200,000
Qualifying Widow* $200,000
*with
qualifying person or dependent child
Thus, all earnings that are subject to the current 1.45% Medicare Tax
are subject to the Additional Medicare Tax of 0.9% to the extent the earnings
paid are in excess of the applicable threshold for the individual’s filing
status. In effect, this change increases the Medicare Tax rate on those
“excess” earnings from 1.45% to 2.35%.
Example:
Michael, who is single, earns $220,000 in 2013 from his employer. His Medicare
Tax will be $2,900 (i.e., $200,000 x 1.45%) plus
$470 (i.e., $20,000 x 2.35%), for a total of $3,370.
Note that the Additional Medicare Tax only applies to the employee or self-employed person’s
portion of the Medicare Tax. The employer’s portion continues to be 1.45% of
earnings.
Self-employed individuals pay the Additional Medicare Tax as part of
their self-employment tax liability.
Employer’s Withholding
Requirement
The guidance provides that, under the Act, an employer is required to
withhold the Additional Medicare Tax on wages or compensation it pays to an
employee in excess of $200,000 in a calendar year. This is so despite the fact
that the taxpayer may not be subject to the Additional Medicare Tax (for
instance, if the individual, together with her or his spouse, is not subject to
the Additional Medicare Tax because their joint earnings do not exceed the
$250,000 threshold applicable to married couples filing a joint return).
No Notification Required
Note that an employer is not required to notify an employee of the
additional withholding requirement that may apply on account of the Additional
Medicare Tax. Also, an employee may not request additional withholding specifically for the Additional Medicare
Tax even if the employee expects to owe an Additional Medicare Tax liability
(for example, if the individual earns less than $200,000 but, together with her
or his spouse, the couple will earn more than the $250,000 joint filer
threshold). An employee may, however, adjust her or his income tax withholding
amount by filing a new IRS Form W-4, and any excess withholding will be applied
toward the individual’s overall federal tax liability, including the Additional
Medicare Tax.
We Can Help
We can provide employers with information and guidance with respect to
the collection of the Additional Medicare Tax. Contact us today.