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New Medicare Tax Under the Healthcare Reform Law

The Patient Protection and Affordable Care Act (“the Act”) contains tax increases that will go into effect for tax years beginning after December 31, 2012. One such tax is an additional hospital insurance tax (“Additional Medicare Tax”) for higher-earning self-employed and working taxpayers. Recently, the IRS released guidance containing some frequently asked questions and answers that provide affected employers with the information necessary to meet new withholding requirements.

Additional Medicare Tax Liability
Under the Act, an individual is subject to an Additional Medicare Tax of 0.9% if his or her wages, other compensation, and/or self-employment income (together with those of a spouse, if filing a joint return) exceed the following threshold amounts based on the individual’s or couple’s federal income tax filing status:

Filing Status Wage Threshold
Married, jointly $250,000
Marriedd, separately $125,000
Single $200,000
Head of household* $200,000
Qualifying widower* $200,000

*with qualifying person or dependent child

Thus, all earnings that are subject to the current 1.45% Medicare Tax are subject to the Additional Medicare Tax of 0.9% to the extent the earnings paid are in excess of the applicable threshold for the individual’s filing status. In effect, this change increases the Medicare Tax rate on those “excess” earnings from 1.45% to 2.35%.

Example: Michael, who is single, earns $220,000 in 2013 from his employer. His Medicare Tax will be $2,900 (i.e., $200,000 x 1.45%) plus $470 (i.e., $20,000 x 2.35%), for a total of $3,370.

Note that the Additional Medicare Tax only applies to the employee or self-employed person’s portion of the Medicare Tax. The employer’s portion continues to be 1.45% of earnings.

Self-employed individuals pay the Additional Medicare Tax as part of their self-employment tax liability.

Employer’s Withholding Requirement
The guidance provides that, under the Act, an employer is required to withhold the Additional Medicare Tax on wages or compensation it pays to an employee in excess of $200,000 in a calendar year. This is so despite the fact that the taxpayer may not be subject to the Additional Medicare Tax (for instance, if the individual, together with her or his spouse, is not subject to the Additional Medicare Tax because their joint earnings do not exceed the $250,000 threshold applicable to married couples filing a joint return).

No Notification Required
Note that an employer is not required to notify an employee of the additional withholding requirement that may apply on account of the Additional Medicare Tax. Also, an employee may not request additional withholding specifically for the Additional Medicare Tax even if the employee expects to owe an Additional Medicare Tax liability (for example, if the individual earns less than $200,000 but, together with her or his spouse, the couple will earn more than the $250,000 joint filer threshold). An employee may, however, adjust her or his income tax withholding amount by filing a new IRS Form W-4, and any excess withholding will be applied toward the individual’s overall federal tax liability, including the Additional Medicare Tax.

We Can Help
We can provide employers with information and guidance with respect to the collection of the Additional Medicare Tax. Contact us today.

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