New York - As 2013 comes to an end, employers, employees, and self-employed individuals should make sure they are complying with the new, 0.9% additional Medicare tax. “While it became effective at the beginning of 2013, its effects are not fully felt until your wages earned during 2013 reach a threshold level which, for many employees, will not occur until the last quarter of the year,” warns Michael Sonnenblick, Esq., a tax analyst at Thomson Reuters.
Beginning in 2013, employers are required to withhold a 0.9% additional Medicare tax on the wages they pay an employee in excess of $200,000. Self-employed individuals must do their own withholding.
The tax applies only to employees and self-employed individuals, not to employers, and is in addition to the 1.45% / 2.9% (regular) Medicare tax that all wage earners/self-employed individuals pay.
Up-to-date analyses of legislation and regulations, authored by Sonnenblick and hundreds of other experts, are available to tax and accounting professionals on the industry-leading, award-winning Thomson Reuters Checkpoint research platform.
Following, Sonnenblick explains what employees need to know about new Medicare tax:
Withholding of the additional Medicare tax begins in the pay period in which your employer pays you wages in excess of $200,000. But employers are not required to notify you when they begin withholding. Wages for this purpose are defined the same as for the regular Medicare tax and so may include items such as taxable non-cash fringe benefits, tips, and third-party sick pay.
You should be aware that required withholding of the additional Medicare tax may result in over- or under- withholding of the actual tax you may owe. That is because, even though the 0.9% additional Medicare tax applies to wages in excess of $250,000 for joint filers ($125,000 for a married individuals filing separately, and $200,000 for all others), employers are required to withhold on wages paid in excess of $200,000 regardless of the your filing status; wages paid to you by another employer; or any self-employment income you might receive.
If you have additional wage income from another job or your spouse also has wage income amounts withheld, although proper for that particular job, may not be sufficient to cover your actual additional Medicare tax liability.
Example 1: In this scenario, assume that you earn $210,000 annually and your spouse earns $150,000, and you file jointly. Your employer will withhold additional Medicare tax on the $10,000 it pays you that is in excess of the $200,000 withholding threshold, and your spouse’s employer will not withhold additional Medicare tax because your spouse’s earnings do not exceed $200,000. But, you will owe additional Medicare tax on $110,000 (the excess of your combined earnings over $250,000).
If you are concerned about not having the proper amount of the tax withheld, you cannot specifically request that your employer withhold additional 0.9% additional Medicare tax. Instead, to avoid under-withholding, you should file a new W-4 with your employer to request that additional income tax be withheld, or make estimated tax payments.
The withholding rules may even require that employers withhold additional Medicare tax where you have no additional Medicare tax liability. And you cannot ask your employer to stop or reduce required withholding.
Example 2: In this scenario, assume you earn $210,000 annually, your spouse does not work, and you file jointly. Your employer is required to withhold additional Medicare tax on $10,000 of the $210,000 you receive. But you and your spouse will not owe any additional Medicare tax because your combined annual salary is under $250,000, the threshold for application of the tax for joint filers. And your employer is not allowed to reduce or stop this required withholding. Instead, you will have to claim a refund for those amounts on your tax return.
An employer that does not deduct and withhold the additional Medicare tax as required is liable for the tax unless the amount that should have been withheld is paid by the employee. And, regardless of liability, an employer that does not meet its additional Medicare tax withholding, deposit, reporting, and payment responsibilities may be subject to penalties.
The IRS has provided detailed guidance on the additional Medicare tax withholding requirements. Among the topics the IRS addresses are: when employers must withhold and how withholding applies to the payment of noncash fringe benefits, tips, group-term life insurance, third-party sick pay, and nonqualified deferred compensation. Your tax advisor can help you navigate these rules or visit http://www.irs.gov.
While there is still time in 2013, all parties have some actionable items. Employers should be checking their payroll systems to make sure they have properly begun to withhold from their high-earners; employees should be making some calculations to see if they need to increase their withholding; and self-employed individuals should be talking with their tax return preparers to insure proper estimated tax payments are being made. If you act now, you can minimize any penalties and interest that apply because of a failure to pay this new additional Medicare tax.
Taxpayers should consult with a personal tax adviser before applying these or other tax strategies.
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