October 09, 2013
Additional Medicare Tax
By Robert Pesce, Partner, Tax & Business
As 2013 comes to an end, employers, employees and self-employed individuals should make sure they are complying with the new 0.9 percent additional Medicare tax.
This new rule was effective at the beginning of 2013, but the effects will not be fully felt until wages reach a threshold level which, for many employees, will not occur until the final months of the year. This additional tax will also need to be considered when processing year-end bonuses.
Beginning in 2013, employers were required to withhold an additional 0.9 percent Medicare tax on the wages paid to any employee whose wages exceed $200,000.
The tax applies only to employees and self-employed individuals, not employers, and is in addition to the 1.45 percent / 2.9 percent (regular) Medicare tax that all wage earners/self-employed individuals pay.
The required withholding of the additional Medicare tax may result in over- or under- withholding of the actual tax owed. This is because, employers are required to withhold on wages paid in excess of $200,000 regardless of the employee’s filing status. The actual threshold for the additional tax is $250,000 for joint filers.
Assume that an employee’s wages are $220,000 annually and his/her spouse earns $150,000, and they file a joint tax return. The employer will be required to withhold the additional Medicare tax on the $20,000 of wages that is in excess of the $200,000 withholding threshold. The spouse’s employer will not withhold additional Medicare tax because their earnings do not exceed $200,000. But, together, the employee and spouse will owe additional Medicare tax on $120,000 (the excess of the combined earnings over $250,000.)
In order to avoid under-withholding, such as in the above situation, taxpayers should consider filing a new form W-4 with their employers to request that additional income tax be withheld, or alternatively, make estimated tax payments to make up the difference.
The new withholding rules will require that employers withhold the additional Medicare tax even if employees have no additional Medicare tax liability. Since this is a payroll requirement, employees cannot request that the employer reduce the required withholding.
Assume an employee earns $220,000 annually, and the spouse does not work. The couple file a joint tax return. The employer is required to withhold additional Medicare tax on the $20,000 of the $220,000 compensation. However, the employee and spouse will not owe any additional Medicare tax because the joint annual salary is under $250,000, the threshold for joint filers. In this example the taxpayers will have to claim a refund for those amounts on their tax return.
Between now and the end of the year, employers should be checking their payroll systems to ensure they have properly begun to withhold from their high-earners. Employees should be making some calculations to see if they need to increase their withholding and self-employed individuals should be planning, with their tax return preparers, to be sure estimated tax payments are being made. Paying taxes now, can minimize penalties and interest that apply for failure to pay the additional Medicare tax.Taxpayers should consult with their Marcum tax adviser on these or other tax matters.