Effective January 1, 2013, married couples who file joint federal income tax returns will be subject to an additional 0.9% tax on their (joint) Medicare wages that exceed $250,000 per year. Single taxpayers (and those who file as “head of household” or as a qualifying widow(er) with a dependent child) will be subject to the additional tax on their Medicare wages in excess of $200,000 per year, and married individuals who file separately will be subject to the additional tax on all Medicare wages over $125,000 per year. This additional 0.9% tax (which applies only to the employee’s share of federal employment taxes) was enacted as part of the 2010 Affordable Care Act (i.e., the “health care reform” legislation), and applies to all FICA wages (with no cap), Railroad Retirement Tax Act compensation and self-employment income in excess of the applicable dollar thresholds.
Under the Tax Code (as amended by the Affordable Care Act), employers must withhold this additional 0.9% tax from all Medicare wages in excess of $200,000, regardless of the employee’s marital status (i.e., even though a married individual who files jointly is not liable for the tax unless the couple’s joint wages exceed $250,000, and even though a married individual who files separately is subject to the tax on all wages in excess of $125,000). So basically, an employer is required to treat every employee as if he or she were a “single” taxpayer (at least for purposes of this “additional” 0.9% tax on Medicare wages).
On November 30, 2012, the IRS issued proposed regulations and related FAQs with respect to this new tax, which is generally referred to as the “Additional Medicare Tax.” The proposed regulations (which employers may rely on even though they have not yet been finalized) and the more user-friendly FAQs clarify that:
- From an individual’s perspective, all wages that are currently subject to the Medicare Tax will be subject to this Additional Medicare Tax if they exceed the applicable threshold for that taxpayer’s filing status. The individual must pay any portion of the tax that is not withheld and paid by the individual’s employer. If an individual anticipates that he or she will owe more than the amount withheld by the employer, the individual should either (i) make estimated tax payments, or (ii) request additional income tax withholding using IRS Form W-4, Employee’s Withholding Allowance Certificate. Note that an employee may not request that the employer withhold additional Medicare tax. Employees must report the additional 0.9% tax on their Form 1040, take credit for any amount withheld by their employer during the year, and pay any tax due (i.e., any Additional Medicare Tax that was not previously paid through withholding or estimated tax payments).
- From an employer’s perspective, the Additional Medicare Tax must be withheld from all of an employee’s Medicare wages in excess of $200,000 paid during a calendar year, regardless of the employee’s marital or tax-filing status. An employer has this withholding obligation even though a given employee may not be liable for the Additional Medicare Tax — because, for example, the employee’s wages, together with those of his or her spouse, do not exceed the $250,000 threshold for married taxpayers filing a joint return.
- There is no required “employer match” for this Additional Medicare Tax (as there is with the regular Medicare tax). Only employees will pay this additional 0.9% tax.
- As noted above, an employee may not request that an employer withhold additional Medicare tax. For example, a married taxpayer who files separately is subject to the additional tax on Medicare wages over $125,000, but the employer may not withhold the additional tax on wages below $200,000. If such an employee anticipates that he or she will owe more Medicare tax than the employer withholds, he or she must either (i) file and pay estimated tax, or (ii) ask the employer to withhold additional federal income tax. Likewise, an employer cannot honor a married employee’s request to cease withholding (on wages over $200,000) simply because the employee and his or her spouse will not have combined wages of more than the $250,000 threshold for married taxpayers filing jointly.
- An employer that knows (or anticipates) that an employee will have more than $200,000 of Medicare wages for the year may not withhold the additional 0.9% tax (i.e., the anticipated Additional Medicare Tax on the portion of the employee’s wages over $200,000) ratably throughout the year. The employer must withhold the additional tax only from wages paid in excess of the $200,000 withholding threshold. Likewise, if an employer makes a single payment to an employee that, when combined with previous payments, exceeds $200,000, the employer should withhold the additional Medicare tax only from the portion of the payment that causes the employee’s wages to exceed $200,000 for the year.
For additional information concerning an employer’s obligation to withhold, or an individual’s obligation to pay, this additional 0.9% tax on Medicare wages above the applicable threshold, please contact any member of Spencer Fane’s Employee Benefits Practice Group.