Health Care Reform: Additional Medicare Tax Under the Affordable Care Act
Beginning on January 1, 2013, pursuant to IRC §3101(b) as modified by the Affordable Care Act (ACA), an Additional Medicare Tax will be imposed. The IRS has issued guidance in the form of responses to frequently asked questions (FAQs) to explain the withholding obligations of employers with respect to the new tax. This guidance can be found on the IRS website at: http://www.irs.gov/.
Basics of the Additional Medicare Tax
The new Medicare tax is imposed in addition to the standard Medicare tax that is currently paid by the employee at 1.45 percent, and matched by the employer, also at 1.45 percent. The new tax will be 0.9 percent of the wages and other compensation of individuals in excess of specified threshold amounts, making the effective rate for individuals on those amounts at 2.35 percent. The rate paid by employers does not change.
The Additional Medicare Tax is only paid on compensation amounts above the following threshold limits:
|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|
Duties of the Employer
Though employers are not liable for this Additional Medicare Tax, they do have important reporting and withholding obligations.
- Employers must withhold the additional tax on all compensation in excess of $200,000 without regard to the employee’s marital status, and irrespective of whether the employee is liable for the tax.
Note – The employer’s withholding obligation is triggered on compensation in excess of $200,000, regardless of the threshold amount above which the individual owes the tax. For example, when filing jointly, the combined income of the employee and spouse must be greater than $250,000 for the employee to owe the Additional Medicare Tax. If their combined income is less than $250,000, the employer may have withheld amounts that the employee does not owe. This will be corrected, however, as the employee will be entitled to a tax credit on his or her income tax returns equal to the excess Medicare tax withheld.
- The Additional Medicare Tax that employers withhold will have to be reported on the 2013 Form W-2, likely on line 6 (Medicare Tax Withheld).
- The Additional Medicare Tax must be withheld on compensation that is:
- earned by employees who are non-resident aliens and U.S. citizens living abroad;
- reported as tips;
- in the form of noncash fringe benefits;
- imputed income from group-term life insurance;
- sick or disability pay paid by an insurer or other third party;
- nonqualified deferred compensation (NQDC); and
- Railroad Retirement Act (RRTA) compensation.
In all of the above cases, the Additional Medicare Tax must be withheld where the listed form of compensation alone or in combination with the employee’s standard payroll compensation exceeds the $200,000 threshold.
- Where a single payment of wages exceeds $200,000, the employer is to withhold the additional tax only on the amount that exceeds the threshold. For example, if an employee has been paid $180,000 in wages through the end of November, and gets a $50,000 bonus on December 1, the Additional Medicare Tax is to be withheld only on the $30,000 that exceeds the $200,000 threshold and not on the $20,000 that brought the employee’s compensation to that level. The employer would also withhold the Additional Medicare Tax on any other compensation received by this employee during the remainder of December.
- If an employee performs services for various subsidiaries of a company (i.e., the entities are part of the same controlled group of companies), the wages paid by each subsidiary should be combined for purposes of determining whether the threshold has been reached only if the wages paid on behalf of each subsidiary are paid by a common paymaster. If each subsidiary pays the employee through its own payroll department only the wages earned working for that subsidiary, then the employee has a separate threshold determined with respect to each subsidiary.
- Wages paid by an agent under Form 2678, that is acting as an agent of two separate employers, should not combine the wages paid to an employee on behalf of the separate employers in determining whether to withhold the Additional Medicare Tax.
To accommodate these new withholding obligations, the IRS intends to revise Forms 941, 943 and other tax return forms that employers and payroll service providers will need to file.
Employers should prepare for these new withholding responsibilities and ensure that their accounting and payroll departments have the necessary policies and procedures in place to comply, and should contact their payroll service providers, if any, to ensure they are also in a position to adequately handle this new task.
If you have any questions about this new Additional Medicare Tax, any other aspect of health care reform or any other employee benefit issues, please contact any of the Employee Benefits attorneys.