In its year-end sprint to release guidance, the IRS recently issued final regulations (TD 9645) implementing the “Additional Medicare Tax” as added by the Affordable Care Act. The final regulations come one year after the proposed rules and the receipt of only a handful of comments by the IRS.
The Additional Medicare Tax, which became effective in 2013, is an additional 0.9% tax on wages, compensation, and self-employment income over certain thresholds. The regulations detail, among other things, how to withhold the Additional Medicare Tax from the wages and compensation of certain individuals and how to correct an underpayment or overpayment of the tax.
The Additional Medicare Tax is triggered when an individual’s wages, compensation, or self-employment income (together with that of his or her spouse, if filing a joint return) exceed the following threshold amounts:
- 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
An employer must withhold the Additional Medicare Tax from wages it pays to an individual in excess of $200,000 in a single calendar year, regardless of (1) the individual’s filing status or (2) wages paid by another employer. While an individual may owe more or less than the amount withheld by the employer, depending on his/her individual’s filing status, as well as his/her wages, compensation, and self-employment income (and those of his/her spouse), the employer cannot modify its Additional Medicare Tax withholding. However, in the case when an individual expects that they will owe more than the amount withheld by their employer, the individual may have their employer withhold an additional amount of income tax withholding on his/her Form W-4. This may be appropriate when, for example, a married person who files a joint return and his/her spouse earn in excess of $250,000 in annual income jointly, but neither spouse alone earns compensation in excess of $200,000 (so neither spouse’s employers is required to withhold Additional Medicare Tax).
In order to correct an overpayment of income tax or Additional Medicare Tax, an employer may make an interest-free adjustment on the appropriate corrected return, but only if the employer repays or reimburses the employee before the end of the calendar year in which the compensation was paid. In the same vein, in the event of an underpayment of income tax or Additional Medicare Tax, an employer may make an interest-free adjustment on the appropriate corrected return, but only to the extent the error is discovered within the calendar year in which the compensation was paid. For more information, check out the IRS’s FAQs.