IRS Releases Faqs on New Medicare Tax

January 9, 2013

The Patient Protection and Affordable Care Act (PPACA) imposes an additional tax on high income earners. Starting January 1, 2013, employers must withhold an additional Medicare tax of 0.9% from the wages of employees who earn $200,000 or more. The Internal Revenue Service (IRS) recently issued Frequently Asked Questions (FAQs) to assist employers in implementing the new tax.


Highlights of the FAQs include:

An employer is required to withhold the additional tax on wages or compensation it pays to an employee in excess of $200,000 in a calendar year.

The employer is not required to notify an employee when it begins withholding the additional tax.

The additional tax only applies to the employee’s portion of the tax; no employer contribution is required.

An employee may not request additional withholding specifically for the additional tax.

The IRS intends to release drafts of revised forms, including Forms 941, 943 and the tax return schemas for the Form 94X series of returns.

The IRS’ FAQs can be found here.


Background

FICA imposes two taxes on both employers and employees. One tax finances Social Security while the other tax finances Medicare. Both employees and employers pay a total Social Security tax of 12.4% (6.2% each, although employees will pay a reduced rate of 4.2% until December 31, 2012) of the employee’s wages (up to the Social Security wage base of $110,100 (for 2012)). For purposes of the Medicare tax, employers and employees both currently pay a total tax of 2.90% (1.45% each) of the employee’s wages. Self-employed individuals are also subject to a self-employment tax consisting of the same components and are similarly affected by the increase in Medicare taxes (on self-employment income in excess of the threshold amounts).

The health care reform law imposes an additional Medicare tax increment on high income earners. As a result, in addition to the 1.45% Medicare tax, a 0.9% Medicare tax will be imposed on taxpayers who receive wages in excess of $200,000 ($250,000 for taxpayers filing a joint return and $125,000 for married taxpayers filing separate returns). This will increase the employee’s portion of the Medicare tax to 2.35% (a total Medicare rate of 3.8% on wages in excess of the threshold amount). While both employers and employees currently pay the 1.45% Medicare tax, the 0.9% increase only affects employees. This tax applies to wages received for tax years beginning after December 31, 2012.

The additional 0.9% Medicare tax is based on the combined wages of the employee and the spouse (unlike the 1.45% tax), but employers will only be obligated to withhold the additional Medicare tax if the employee receives wages from the employer in excess of $200,000. The employer has no responsibility relative to wages received by the spouse. The employee is responsible for paying the additional tax if the employer is not. Any underpayments of the tax will be subject to penalties. Employers will need to review their current payroll processes to ensure that it applies the increased tax to its high income employees.


Disclaimer: The information provided on this webpage is for informational purposes only. It is not and is not intended to be tax or legal advice. Consult with your own tax advisor and/or attorney.