IRS Offers Initial Guidance on Additional Medicare Tax on High Earners, Effective in 2013

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Under the Patient Protection and Affordable Care Act (Pub. L. No. 111-148, as amended), the Medicare tax rate will increase 0.9% (for employee withholding only) – from 1.45% to 2.35% – on wages paid over $200,000, effective for taxable years after December 31, 2012. The IRS has posted questions and answers on its website to assist employers and payroll service providers in adapting systems and processes that may be impacted [Questions and Answers for the Additional Medicare Tax, 6-11-12;]. In addition, in conference calls with the APA and other payroll industry stakeholders, the IRS has discussed related Form 94x series reporting issues. Note: Get full details in the next issue of PAYROLL CURRENTLY.

  • An individual is liable for the additional Medicare tax if the individual’s wages, other compensation, or self-employment income (together with that of his or her spouse if filing a joint return) exceed the threshold amount for the individual’s filing status.
  • All wages that are currently subject to Medicare tax are subject to the additional Medicare tax if they are paid in excess of the applicable threshold for an individual’s filing status.
  • The statute requires an employer to withhold additional Medicare tax on wages or compensation it pays to an employee in excess of $200,000 in a calendar year, regardless of whether the employee will actually reach the applicable threshold. Any discrepancies between the amount withheld and the amount of the employee’s actual liability for the additional Medicare tax will be reconciled on the individual’s income tax return (Form 1040).
  • There is no employer match for the additional Medicare tax (as there is with the regular Medicare tax). Therefore, employers will continue to pay an amount equal to 1.45% of the employee’s wages in excess of $200,000.
  • An employee who anticipates liability for the additional Medicare tax may request additional income tax withholding on Form W-4.
  • 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. It may not withhold the additional Medicare tax in anticipation of an employee’s wages exceeding the threshold. If a wage payment takes an employee from under $200,000 in wages paid to over $200,000 in wages paid, the employer must not withhold the additional Medicare tax on the wages paid up to $200,000.
  • Additional Medicare tax withholding applies only to wages paid to an employee that are in excess of $200,000 in a calendar year.
  • Wages paid by an employer and third-party sick payer need to be aggregated to determine whether the $200,000 withholding threshold has been met. The same rules that currently assign responsibility for sick pay reporting and payment of Medicare tax apply also to additional Medicare tax.
  • An employer calculates wages for purposes of withholding additional Medicare tax from nonqualified deferred compensation in the same way that it calculates wages for withholding the existing Medicare tax from nonqualified deferred compensation.
  • 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 payer on behalf of each subsidiary should be combined only if the payer is a common paymaster.
  • An agent with approved Forms 2678, Employer Appointment of Agent, acting as an agent for two employers should not combine the wages paid on behalf of the separate employers in determining whether to withhold additional Medicare tax.

Form 941 reporting
The IRS advises that the 2013 94x series forms will have a new line added for reporting the additional Medicare tax on wages and tips paid to an employee in excess of $200,000 (APA anticipates that it will be Line 5d). The IRS has not confirmed that Medicare wages in excess of $200,000 will be reported on the new line. Line 5c, Taxable Medicare wages & tips, will be unchanged and the employer will report the first $200,000 in Medicare wages plus the employee and employer tax on those wages.

Form W-2 unchanged
The IRS advises that it will not add additional boxes to Form W-2 for the additional Medicare tax on wages in excess of $200,000. Employers will report aggregate Medicare wages and tips in Box 5 and the aggregate Medicare tax in Box 6.

Wages insufficient for additional Medicare tax withholding
The IRS advises that when an employee’s cash wages are insufficient to allow withholding of the additional Medicare tax on wages in excess of $200,000, then for purposes of reporting on 94x series forms the non-withholding will be handled like standard Medicare tax non-withholding. The taxes will be reported on Form 941 on the new line and the line for total social security and Medicare taxes (currently Line 5d), with an appropriate adjustment for the Medicare tax not withheld on Form 941, Line 9. However, the additional Medicare tax on the wages in excess of $200,000 that cannot be withheld will not be reported on Form W-2 in Box 6 or in Box 12, with Codes B or N. The IRS will process the additional Medicare tax through the employee’s income tax return.