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IRS Issues Guidance on Additional Medicare Tax

This article was originally featured in our ADP Eye on Washington update.

On November 30, 2012, the Internal Revenue Service (IRS) released proposed regulations and updated Questions and Answers in relation to the additional 0.9% Medicare tax imposed on high earners, which is effective January 1, 2013. 

Background
Effective for wages paid on or after January 1, 2013, the Medicare tax rate increases from 1.45 percent to 2.35 percent on wages earned above $200,000 for single filers and $250,000 for joint filers ($125,000 for a married individual filing separately).   This increase only applies to the employee portion of the Medicare tax. Employers do not have to match the increased Medicare tax amount. However, employers are still responsible for the withholding and reporting obligations with respect to the increased employee Medicare tax.  If an employer fails to withhold and deposit the additional Medicare tax amount AND the employee pays it with their tax return, the employer will not be required to pay the amount not deducted, but the employer will be subject to penalties for the failure to withhold the tax.   The employer is required to withhold the increased amount from all workers with wages exceeding $200,000 regardless of the marital status claimed on the employee’s Form W-4. Over- and under-withholding for the employee will be reconciled upon the filing of his/her individual tax return.

The IRS proposed regulations provide guidance for employers and individuals in relation to the implementation of the 0.9% Additional Medicare Tax, including the requirements to file a return to report the additional Medicare tax.  Guidance is also provided on the employer process for making adjustments of underpayments and overpayments of the tax and the employer and employee processes for filing a claim for a refund for an overpayment. 

A few highlights of the proposed regulations and Q&As are as follows:

• In determining whether wages exceed $200,000 an employer may not take into account the employee’s filing status or other wages (e.g., from a prior employer)  that may impact the employee’s liability for the Additional Medicare Tax.

• An employee may not request that the employer deduct and withhold Additional Medicare Tax on wages of $200,000 or less. However, an employee may adjust his Form W-4 to request additional income tax withholding, which can be credited against any Additional Medicare Tax that is due.

• The $200,000 withholding threshold applies to each single employer.  However, amounts disbursed by a common paymaster are treated as paid by a single employer.

• To the extent that the Additional Medicare Tax is not withheld by the employer, the employee remains liable for the tax.  The IRS will not collect the under withheld Additional Medicare Tax amount from the employer if the employee subsequently pays the Additional Medicare Tax.  However, the employer would be subject to any applicable penalties or additional tax due for failure to withhold the tax as required.

• Individual taxpayers must report the Additional Medicare Tax on Form 1040 and pay any tax due to the IRS that was not previously paid through withholding by the employer or estimated tax.

• Employees may claim a credit or request a refund of overpaid Additional Medicare Tax by requesting as such on his/her Form 1040.  The proposed regulations eliminate the requirements that the employee first seek a refund from the employer and provide a statement in support of the employee’s claim.

For a copy of the proposed regulations, please click on the link provided below.

http://www.gpo.gov/fdsys/pkg/FR-2012-12-05/pdf/2012-29237.pdf

As noted above, the IRS in conjunction with the proposed regulations released new “Questions and Answers” regarding the Additional Medicare Tax. 

A sampling of the IRS Questions and Answers are as follows:

17. Are wages that are not paid in cash, such as fringe benefits, subject to Additional Medicare Tax?
Yes, the value of taxable wages not paid in cash, such as noncash fringe benefits, are subject to Additional Medicare Tax, if, in combination with other wages, they exceed the individual’s applicable threshold.  Noncash wages are subject to Additional Medicare Tax withholding, if, in combination with other wages paid by the employer, they exceed the $200,000 withholding threshold.

24. Is an employer liable for Additional Medicare Tax even if it does not withhold it from an employee’s wages?
An employer that does not deduct and withhold Additional Medicare Tax as required is liable for the tax unless the tax that it failed to withhold from the employee’s wages is paid by the employee.  Even if not liable for the tax, an employer that does not meet its withholding, deposit, reporting, and payment responsibilities for Additional Medicare Tax may be subject to all applicable penalties.

25. Is an employer required to notify an employee when it begins withholding Additional Medicare Tax?
No. There is no requirement that an employer notify its employee.

26. Is there an “employer match” for Additional Medicare Tax (as there is with the regular Medicare tax)?
No. There is no employer match for Additional Medicare Tax.

30. I have two employees who are married to each other. Each earns $150,000, so I know that their combined wages will exceed the threshold applicable to married couples that file jointly. Do I need to withhold Additional Medicare tax?
No. An employer should not combine wages it pays to two employees to determine whether to withhold Additional Medicare Tax. An employer is required to withhold Additional Medicare Tax only when it pays wages in excess of $200,000 in a calendar year to an employee.

39. If an agent pays wages to an employee on behalf of an employer (under an approved Form 2678, Employer Appointment of Agent), then, for purposes of determining whether wages are paid in excess of the $200,000 withholding threshold, should the agent combine those wages with wages paid to that same employee
• directly by the employer,
• by the same agent on behalf of a different employer, or
• by another agent on behalf of the same employer?
No. Wages paid by an agent with an approved Form 2678 on behalf of an employer should not be combined with wages paid to the same employee by any of the above other parties in determining whether to withhold Additional Medicare Tax.

41. Will the IRS be changing Form 941 or any other forms for tax year 2013 to be completed by employers and payroll service providers?
Yes.  For example, a line will be added to Form 941 on which employers will report any individual’s wages paid during the quarter that is in excess of $200,000 for the year, and on which employers will report their withholding liability for Additional Medicare Tax on those wages. The existing line, on which employers report the liability for regular Medicare tax on all wages, will remain unchanged.

However, there will be no change to Form W-2. Additional Medicare Tax withholding on wages subject to Federal Insurance Contributions Act (FICA) taxes will be reported in combination with withholding of regular Medicare tax in box 6 (“Medicare tax withheld”).

The IRS plans to release drafts of revised forms, including Forms 941, 943, and the tax return schemas for the F94X series of returns.

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For a copy of the IRS Questions and Answers on the Additional Medicare Tax, please click on the link provided below:

http://www.irs.gov/Businesses/Small-Businesses-&-Self-Employed/Questions-and-Answers-for-the-Additional-Medicare-Tax

The proposed rules appeared in the Federal Register on December 5, 2012. Comments on the proposed regulations must be received by March 5, 2013.  The proposed rules will be effective on the date that finalized rules are published in the Federal Register.

Learn more about employment tax solutions from ADP that work with your existing payroll system.


One comment on “IRS Issues Guidance on Additional Medicare Tax”

  1. katherine says:

    Great article. Thanks for the info, it’s easy to understand. BTW, if anyone needs to fill out a Form W-4,I found a blank form here http://bit.ly/1vexlZO

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