Employee Benefits Compliance, Taxes, Fees & Penalties

Additional Medicare Tax on High Earners: Final Regulations Issued

 On Nov. 26, 2013, the IRS issued final regulations implementing the Affordable Care Act’s Additional Medicare Tax. The Additional Medicare Tax applies to wages and self-employment income over certain thresholds ($200,000 for single tax filers and $250,000 for married filing jointly).  Employers are responsible for withholding the tax on wages but are not required to pay a matching amount.  

This ACA provision applies to all size employers, whether or not they offer group health coverage and regardless of type or size of plan offered.  The requirement to withhold the additional Medicare Tax was effective as of January 1, 2013, but employers are not actually required to start withholding the additional payroll tax until the first payroll period (of the calendar year) in which the employee’s compensation exceeds $200,000.  This single filer threshold applies regardless of the employee’s actual filing or marital status.

The amount of the additional Medicare Tax is 0.9 percent.  This is in addition to the current 1.45% payroll tax on wages, tips and commissions.  Employers are NOT required to match the additional 0.9% or to notify employees.  There is no exception to this rule for nonresident aliens and U.S. citizens living abroad.

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.

The thresholds over which the additional Medicare Tax applies are the following:

Filing Status

Threshold Amount

Married filing jointly $250,000
Married filing separate $125,000
Single $200,000
Head of household (with qualifying person) $200,000
Qualifying widow(er) with dependent child $200,000

 

Below are some of the frequently asked questions and the IRS answers that relate to employers and payroll service providers.  The proposed regulations themselves contain many additional questions and answers.

When must an employer withhold Additional Medicare Tax?

Effective Jan. 1, 2013, an employer must withhold Additional Medicare Tax on wages it pays to an employee in excess of $200,000 in a calendar year. An employer has this withholding obligation even though an employee may not be liable for Additional Medicare Tax because, for example, the employee’s wages together with that of his or her spouse do not exceed the $250,000 threshold for joint return filers. Any withheld Additional Medicare Tax will be credited against the total tax liability shown on the individual’s income tax return (Form 1040).

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. An employer is not relieved of its liability for payment of any Additional Medicare Tax required to be withheld unless it can show that the tax has been paid by filing Forms 4669 and 4670. 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.

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.

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.

May an employee request additional withholding specifically for Additional Medicare Tax?

No. However, an employee who anticipates liability for Additional Medicare Tax may request that his or her employer withhold an additional amount of income tax withholding on Form W-4. This additional income tax withholding will be applied against all taxes shown on the individual’s income tax return (Form 1040), including any Additional Medicare Tax liability.

If an employee requests that I stop withholding Additional Medicare Tax from wages in excess of the $200,000 withholding threshold, because the employee and spouse file a joint return and won’t meet the $250,000 threshold for joint filers, should I stop withholding Additional Medicare Tax?

No. As an employer, you must withhold Additional Medicare Tax on wages you pay to your employee in excess of the $200,000 withholding threshold in a calendar year. You cannot honor a request to cease withholding Additional Medicare Tax because you are required to withhold it. Your employee will claim credit for any withheld Additional Medicare Tax against the total tax liability shown on their individual income tax return (Form 1040).

If an employee’s annual Medicare wages are expected to be over $200,000, will an employer withhold Additional Medicare Tax from the beginning of the year or only after Medicare wages are actually paid in excess of $200,000 year-to-date?

An employer is required to begin withholding Additional Medicare Tax in the pay period in which it pays wages in excess of $200,000 to an employee.

If a single payment of wages to an employee exceeds the $200,000 withholding threshold, will an employer withhold Additional Medicare Tax on the entire payment?

No. Additional Medicare Tax withholding applies only to wages paid to an employee that are in excess of $200,000 in a calendar year. Withholding rules for this tax are different than the income tax withholding rules for supplemental wages in excess of $1,000,000 as explained in Publication 15, section 7.

Example. M received $180,000 in wages through Nov. 30, 2013. On Dec. 1, 2013, M’s employer paid her a bonus of $50,000. M’s employer is required to withhold Additional Medicare Tax on $30,000 of the $50,000 bonus and may not withhold Additional Medicare Tax on the other $20,000. M’s employer also must withhold Additional Medicare Tax on any other wages paid in December 2013.

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 does 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.

What should an employer do if an employee receives wages that are not paid in cash, such as taxable fringe benefits, from which Additional Medicare Tax cannot be withheld?

If an employee receives wages from an employer in excess of $200,000 and the wages include taxable noncash fringe benefits, the employer calculates wages for purposes of withholding Additional Medicare Tax in the same way that it calculates wages for withholding Medicare tax. The employer is required to withhold Additional Medicare Tax on total wages, including taxable noncash fringe benefits, in excess of $200,000. The value of taxable noncash fringe benefits must be included in wages and the employer must withhold the applicable Additional Medicare Tax and deposit the tax under the rules for employment tax withholding and deposits that apply to taxable noncash fringe benefits. Additional information on how to withhold tax on taxable noncash fringe benefits is available in Publication 15 (Circular E), section 5, and Publication 15-B, section 4.

 If an employee receives tips and other wages in excess of $200,000 in the calendar year, how is Additional Medicare Tax paid on the tips?

To the extent that tips and other wages exceed $200,000, an employer applies the same withholding rules for Additional Medicare Tax as it does currently for Medicare tax. An employer withholds Additional Medicare Tax on the employee’s reported tips from wages it pays to the employee.

If the employee does not receive enough wages for the employer to withhold all the taxes that the employee owes, including Additional Medicare Tax, the employee may give the employer money to pay the rest of the taxes. If the employee does not give the employer money to pay the taxes, then the employer makes a current period adjustment on Form 941, Employer’s QUARTERLY Federal Tax Return (or the employer’s applicable employment tax return), to reflect any uncollected employee social security, Medicare, or Additional Medicare Tax on reported tips. However, unlike the uncollected portion of the regular (1.45%) Medicare tax, the uncollected Additional Medicare Tax is not reported in box 12 of Form W-2 with code B.

The employee may need to make estimated tax payments to cover any shortage. More information about this process of giving an employer money for taxes is available in Publication 531, Reporting Tip Income.

Should an employer combine an employee’s wages for services performed for all of its subsidiaries if it has an employee who performs services for more than one subsidiary in its company, but the payroll is paid through one of the subsidiaries?

An employer is required to withhold Additional Medicare Tax on wages paid to an employee in excess of $200,000 in a calendar year. When an employee is performing services for multiple subsidiaries of a company, and each subsidiary is an employer of the employee with regard to the services the employee performs for that subsidiary, the wages paid by the payor on behalf of each subsidiary should be combined only if the payor is a common paymaster. Publication 15-A, section 7 contains more information on common paymasters. The wages are not combined for purposes of the $200,000 withholding threshold if the payor is not a common paymaster.

I am a common paymaster that pays wages to an employee who is concurrently employed by related corporations. Should I combine this employee’s wages for purposes of determining whether wages are paid in excess of the $200,000 withholding threshold?

Yes. Liability to withhold Additional Medicare Tax with respect to wages disbursed by the common paymaster is computed as if there was a single employer, just as it is for application of the social security wage base. See section 7 of Publication 15-A for more information on common paymasters.

I use an employee leasing company. How should wages be determined for purposes of the $200,000 withholding threshold?

An employer is required to withhold Additional Medicare Tax on wages paid to an employee in excess of $200,000 in a calendar year. Generally, if you provide wages in excess of the $200,000 withholding threshold to the employee leasing company to pay to an employee that performs services for you, Additional Medicare Tax should be withheld from the wages in excess of $200,000. Taxpayers should be aware that the employer is ultimately responsible for the deposit and payment of federal tax liabilities. Even though you forward tax payments to a third party to make the tax deposits, you may be responsible as the employer for the tax liability.

 

 

How does an employer report Additional Medicare Tax on Form W-2?

There is no change to the boxes on Form W-2. An employer will enter the total employee Medicare tax (including any Additional Medicare Tax) withheld on Medicare wages and tips in box 6 (“Medicare tax withheld”). A railroad employer will report Additional Medicare Tax in box 14.

If an employer underwithholds Additional Medicare Tax (for example, fails to withhold the tax when it pays the employee wages in excess of $200,000 in a calendar year) and discovers the error in the same year the wages are paid but after its Form 941 is filed, how can the employer correct this error?

An employer is liable for Additional Medicare Tax required to be withheld, whether or not it deducts the tax from wages it pays to the employee. If the employer fails to withhold the correct amount of Additional Medicare Tax from wages it pays to an employee and discovers the error in the same year it pays the wages, the employer may correct the error by making an interest-free adjustment on the appropriate corrected return (for example, Form 941-X). Once the employer has discovered the error, the employer should deduct the correct amount of Additional Medicare Tax from other wages or other remuneration, if any, it pays to the employee on or before the last day of the calendar year. However, even if the employer is not able to deduct the correct amount of Additional Medicare Tax from other wages or other remuneration it pays to the employee, the employer must report and pay the correct amount of Additional Medicare Tax on its return. If the employer pays Additional Medicare Tax without having deducted it from wages or other remuneration it pays to the employee, the obligation of the employee to the employer with respect to the payment is a matter for settlement between the employer and the employee. For more information on adjustments, see section 13 of Pub 15 or visit the IRS website and enter the keywords: Correcting Employment Taxes.

If an employer overwithholds Additional Medicare Tax (for example, withholds the tax before it pays the employee wages in excess of $200,000 in a calendar year) and discovers the error in the same year the wages are paid, how can the employer correct this error?

The employer may correct the error by making an interest-free adjustment on the appropriate corrected return (for example, Form 941-X). The employer must first repay or reimburse the overwithheld amount to the employee prior to the end of the calendar year in which it paid the wages. If the employer does not repay or reimburse the employee the amount of overcollected Additional Medicare Tax before the end of the year in which the wages were paid, the employer can not correct the error via an interest-free adjustment. In this case, the employer should report the amount of withheld Additional Medicare Tax on the employee’s Form W-2 so that the employee may obtain credit for Additional Medicare Tax withheld on the employee’s individual income tax return. For more information on adjustments, see section 13 of Pub 15 or visit the IRS website and enter the keywords: Correcting Employment Taxes.