Beginning in 2013, the employee portion of the FICA Medicare payroll tax rate for high income earners will increase by 0.9 percent going from 1.45 percent to 2.35 percent as part of the health care reform legislation passed under the Affordable Care Act. The employer portion of the FICA Medicare tax would remain unchanged at 1.45 percent.
The FICA or Federal Insurance Contributions Act employment tax is made up of the Social Security or Old-Age, Survivors, and Disability Insurance (OASDI) tax and the Medicare or Hospital Insurance (HI) tax. The Social Security or OASDI portion of the FICA payroll tax is currently 6.2 percent for employers and 4.2 percent for employees for wages up to $110,100 in 2012. The government has yet to rule one way or the other whether the 4.2 percent Social Security tax rate for employees will be extended into 2013. The Medicare or HI portion of the FICA payroll tax for 2012 is 1.45 percent for both employers and employees totaling 2.9 percent of covered wages and is not subject to a wage cap like OASDI.
Because of these upcoming payroll tax changes, the IRS has released questions and answers relating to the Additional Medicare Payroll Tax which goes into effect in 2013. The Additional Medicare Payroll Tax applies to individuals' wages, other compensation and self-employment income over certain thresholds. Employers are responsible for withholding the tax on wages and other compensation in certain circumstances. Below are nine of the 20 questions and answers the IRS released that may be of interest to employers.
1. When Does Additional Medicare Tax Start?
Additional Medicare Tax goes into effect for taxable years beginning after December 31, 2012.
2. What is the rate of Additional Medicare Tax?
The rate is 0.9 percent.
3. When are individuals liable for Additional Medicare Tax?
An individual is liable for Additional Medicare Tax if the individual's wages, other compensation, or self-employment income (together with that of his or her spouse if filing a joint return) exceed the threshold amount for the individual's filing status:
- Married Filing Jointly Filing Status: Threshold Amount = $250,000
- Married Filing Separately Filing Status: Threshold Amount = $125,000
- Single Filing Status: Threshold Amount = $200,000
- Head of Household (with Qualifying Person) Filing Status: Threshold Amount = $200,000
- Qualifying Widow(er) with Dependent Child Filing Status: Threshold Amount = $200,000
4. What wages are subject to Additional Medicare Tax?
All wages that are currently subject to Medicare tax are subject to Additional Medicare Tax if they are paid in excess of the applicable threshold for an individual's filing status. For more information on what wages are subject to Medicare Tax, see the chart, Special Rules for Various Types of Services and Payments, in section 15 of Publication 15, (Circular E), Employers Tax Guide.
5. When must an employer withhold Additional Medicare Tax?
The statute requires an employer to withhold Additional Medicare Tax on wages or compensation it pays to an employee in excess of $200,000 in a calendar year.
An employer has this withholding obligation even though an employee may not be liable for the Additional Medicare Tax because, for example, the employee's wages or other compensation together with that of his or her spouse (when filing a joint return) does not exceed the $250,000 liability threshold. Any withheld Additional Medicare Tax will be credited against the total tax liability shown on the individual's income tax return (Form 1040).
6. Is an employer required to notify an employee when it begins withholding Additional Medicare Tax?
No. There is no requirement that an employer notify its employee.
7. Is there an "employer match" for Additional Medicare Tax (as there is with the regular Medicare tax)?
No. There is no employer match for Additional Medicare Tax.
8. If an employee's annual Medicare wages are expected to be over $200,000, will an employer withhold Additional Medicare Tax from the beginning of the year or only after Medicare wages are actually paid in excess of $200,000 year-to-date?
An employer is required to begin withholding Additional Medicare Tax in the pay period in which it pays wages in excess of $200,000 to an employee.
9. Will the IRS be changing Form 941 or any other forms to be completed by employers and payroll service providers?
Yes. The IRS plans to release drafts of revised forms, including Forms 941, 943, and the tax return schemas for the F94X series of returns.
High Income Earners Medicare Payroll Tax Rate Example
So how exactly will the Medicare HI tax rate of 2.35 percent work for high income earners in 2013? Heres an example showing a single, individual tax payer with wages of $245,000. In 2013, a single individual with wages of $245,000 will owe the Medicare HI tax rate of 1.45 percent on the first $200,000 of wages ($200,000 is the threshold amount for those with a filing status of single). The Medicare HI rate of 2.35 percent will be applied to the remaining $45,000 of wages for 2013. Employers will be responsible for collecting and remitting the additional Medicare payroll tax on wages that exceed $200,000.