As you may know, the health care reform legislation increases the employee portion of the Medicare component of FICA taxes for wages received after December 31, 2012, by an additional 0.9% of FICA wages in excess of certain threshold amounts, based on the employee’s tax filing status. This tax is referred to as the “Additional Medicare Tax.”
The threshold amount for applying the Additional Medicare Tax is $250,000 in the case of a joint return, $125,000 in the case of a married taxpayer filing a separate return, and $200,000 in any other case. These provisions apply to SECA taxes on self-employment income as well. Notably, unlike the Medicare tax, there is no employer portion of the Additional Medicare Tax.
Also unlike the Medicare tax, an employer must withhold the Additional Medicare Tax from an employee’s wages only to the extent that the employee receives wages from that employer in excess of $200,000 in a calendar year. In determining whether wages exceed $200,000, an employer does not have to take into account the employee’s filing status or other wages or compensation which may impact the employee’s liability for the tax.
Employers are not required to deduct and withhold the Additional Medicare Tax from employee wages of $200,000 or less. However, an employee who anticipates liability for the Additional Medicare Tax may request that the employer deduct and withhold an additional amount of income tax withholding on his or her Form W-4, which the employee may apply against the taxes shown on his or her Form 1040, including any Additional Medicare Tax liability. Thus, for example, an employee might request that the employer deduct and withhold an additional amount of income tax withholding on wages that are not in excess of $200,000 if the employee is married and files a joint return and anticipates liability for the Additional Medicare Tax because the combined wages of the employee and his or her spouse will exceed $250,000, or if the employee anticipates a large end-of-year bonus that will cause the employee’s income to exceed the threshold.
Further, the employee is liable for any portion of the Additional Medicare Tax not withheld by the employer. The IRS will not seek from an employer the amount of the Additional Medicare Tax the employer failed to withhold from wages paid to an employee if the employee subsequently pays the Additional Medicare Tax. However, an employer remains subject to any applicable penalties or additions to tax for failure to withhold Additional Medicare Tax as required.
Generally, an employer may make adjustments of underpayments of the Additional Medicare Tax only if the error is ascertained in the same year the wages or compensation was paid. Exceptions apply if (1) the underpayment is attributable to an administrative error, (2) other rules apply to determine the amount of the underpayment because the employer failed to treat the individual as an employee, or (3) the adjustment is the result of an IRS examination.
An adjustment of overpaid Additional Medicare Tax may only be made if the employer ascertains the error in the year the wages or compensation was paid and repays or reimburses the employee the amount of the over collection before the end of the calendar year. As in the case of all overpayment adjustments, the requirement to repay or reimburse does not apply to the extent that, after reasonable efforts, the employer cannot locate the employee. However, if an employer has not repaid or reimbursed the amount of the over collection to the employee, an adjustment cannot be made.
An employer may claim a refund of overpaid Additional Medicare Tax only if the employer did not deduct or withhold the overpaid Additional Medicare Tax from the employee’s wages or compensation.
Please contact me if you want to discuss further the employer responsibilities for the Additional Medicare Tax.
