Although it hasn’t garnered as much attention as some of the other provisions in the Affordable Care Act (ACA), the 0.9% additional Medicare tax went into effect Jan. 1, 2013. The tax applies to wages and self-employment income over certain levels and is in addition to the regular 2.9% Medicare tax.
Unlike the regular Medicare tax, which both employees and employers jointly pay (1.45% each), generally only employees are responsible for paying the 0.9% tax. However, employers must withhold the additional tax when a worker’s wages (including noncash fringe benefits) top $200,000 in a single calendar year. If they don’t, they could be subject to penalties and even become liable for paying the tax. So it’s important to make sure you’re fulfilling your withholding obligations.
How the Withholding Works
You don’t need to begin withholding the additional Medicare tax until the pay period in which an employee’s wages exceed $200,000. So, if a worker hits this threshold at the end of November, the withholding would start at that point. You aren’t required to inform workers of the withholding.
You must report the additional Medicare tax withheld on your federal tax returns and on employee W-2 forms. Similarly, you must add together the amounts for the regular and the additional Medicare tax when providing information on your tax deposit via the Electronic Federal Tax Payment System®.
Final IRS regulations issued in November 2013 provide guidance on how to withhold the tax, the reporting requirements and the employer process for adjusting under- and overpayments of the additional Medicare tax. They also explain how to file a claim for a refund of an overpayment.
Employer vs. Employee Responsibilities
It’s important to be aware that you won’t always be able to withhold the same amount of additional Medicare tax that an employee actually owes.
Here’s why: While you’re obligated to withhold the tax on wages that exceed $200,000, some employees whose wages exceed $200,000 won’t actually owe the tax, and some employees with lower wages may still end up owing the tax.
One reason is that the threshold at which a taxpayer owes the tax can differ from $200,000. For taxpayers who are married and filing jointly, for instance, the threshold is $250,000. So, if an employee earns $210,000, you’ll be required to withhold the 0.9% tax on $10,000 ($210,000 – $200,000). However, if the employee’s combined wages and self-employment income with his or her spouse falls below $250,000, the couple won’t owe the additional tax.
In such a case, you can’t grant an employee request to not withhold that tax. But the employee can claim a credit for the withheld amount on his or her income tax return for the year.
In another scenario, a single taxpayer may hold multiple jobs, none of which individually puts him or her above the $200,000 threshold, but together the earnings exceed this threshold. You can’t specifically withhold the additional Medicare tax for the employee. But the employee can use Form W-4 (“Employee’s Withholding Allowance Certificate”) to request an increase in the amount of income tax withheld to cover the Medicare tax shortfall. Alternatively, the employee can make estimated tax payments.
As you can see, the 0.9% Medicare tax and the associated withholding requirements for employers can be confusing. For additional information on the Medicare tax and related withholding requirements, please contact us at 302-225-0500, or click here for email.