Employers, payroll vendors and executives should be planning for the additional Medicare tax that will apply to high wage earners beginning in 2013. The 2010 Health Care Reform Act imposes an additional Medicare tax of 0.9% on employee’s wages in excess of the applicable dollar amount for the employee’s filing status (as shown below):
- Married, filing jointly — $250,000
- Married, filing separately — $125,000
- Single — $200,000
- Head of household (with qualifying person) — $200,000
- Qualifying widow(er) with dependent child — $200,000
Thus, for employees above the threshold, the Medicare tax rate will increase from 1.45% to 2.35% (on the employee portion) for wages in excess of the threshold. The employer portion of the tax will remain unchanged at 1.45%.
IRS guidance issued in June of this year provides the following information regarding the new tax:
- Employers are required to withhold the additional tax on any wages in excess of $200,000 for the year (regardless of the employee’s filing status).
- The additional tax applies only to the amount in excess of this threshold. The additional required withholding must begin in the pay period in which the employee’s wages for the year exceed $200,000 (and not beforehand). Note, though, that the employer is not required to notify the employee when the withholding begins.
- In general, all wage items that are otherwise subject to the basic Medicare tax must be counted in applying the additional tax. This includes taxable noncash fringe benefits (such as the personal use of a company vehicle), imputed income for life insurance and nonqualified deferred compensation (following the otherwise applicable rules for such compensation).
- In addition, for any employee receiving sick pay (e.g., short-term disability) from a third-party payer, the sick pay must be aggregated with any wages paid by the employer in applying the $200,000 threshold. Note also that there is no exception for wages paid to a nonresident alien or U.S. citizen living abroad that are otherwise subject to the Medicare tax.
- Lastly, for an employee employed by more than one subsidiary of a company, the additional tax is to be separately determined and applied by each such employer unless a common paymaster is used (in which case all wages paid by the paymaster must be combined).
In terms of forms, the IRS has indicated that it will update the Forms 941 and 943 (and related forms/instructions) to reflect the new additional Medicare tax requirements.