Final Regulations Issued on Implementation of Additional Medicare Tax

The IRS has issued final regulations on the operation of the 0.9 percent additional Medicare tax, which became effective on January 1, 2013. Generally, the final are effective on or after November 29, 2013. However, taxpayers may rely on rules contained in the proposed regulations for adjusted returns filed before that date.

Under the final regulations, guidance is provided for employers and individuals on the implementation of the additional Medicare tax. An overview of the major provisions follows:

Collection of Tax from Employee<

For tax years beginning on January 1, 2013, employers must begin withholding for the 0.9 percent tax on wages paid an employee in excess of $200,000 in a calendar year. Self-employment income and Railroad Retirement Tax Act (RRTA) compensation are also subject to this withholding.
The employee’s filing status is not a factor in the withholding requirement. As a result, a married couple filing jointly may have combined income greater than $200,000 yet separately their income is below the threshold. In such cases, neither of their employers is required to withhold for the additional Medicare tax. Additional income earned at a second job or as an outside contractor also affects the additional Medicare tax computation. In such cases, it is wise to increase withholding or pay estimated taxes to avoid a penalty for underpayment of tax.

Computation of Additional Medicare Tax<

The additional Medicare tax applies to an individual’s wages (or self-employment income) in excess of the following threshold amounts:
• $250,000 for married taxpayers filing jointly;
• $125,000 for married taxpayers filing separately; and
• $200,000 for single taxpayers, head-of-household taxpayers with a qualifying person, and qualifying widow(er) taxpayers with a dependent child.

Liability for Uncollected Tax<

If the employer does not withhold the additional Medicare tax, the employee is still liable to pay the tax. However, an employer that deducts less than the correct amount of additional Medicare tax, or fails to deduct any additional Medicare tax at all, is still liable for the correct amount of tax that was required to be withheld, unless and until the employee pays the tax. In such cases, the employer is subject to applicable penalties or additions to tax resulting from the failure to withhold as required.

Self-Employed Individuals<

A self-employed individual is liable for the additional Medicare tax to the extent that their self-employment income exceeds the statutory threshold amount above. The applicable threshold is then reduced (but not below zero) by the amount of any wages (excluding RRTA compensation) earned by the self-employed individual.

Filing Requirements<

The additional Medicare tax for the tax year is calculated and reported on Form 1040, U.S. Individual Income Tax Return.

Adjustments of Underpayments<

An employer that files a return reflecting less than the correct amount of additional Medicare tax for an employee’s wages and discovers the error subsequent to the filing of the payroll tax return may correct the error by means of an interest-free adjustment. In order to take advantage of this safe harbor, the error must be caught within the same calendar year that the wages were paid unless the underpayment is due to an inaccurate reporting of the amount actually withheld. If possible, the undercollected amount should be deducted from the employee’s wages paid after the error is discovered.

Credit or Refund of Tax Due to Overpayments<

If an overpayment of additional Medicare tax was deducted or withheld from an employee’s wages, the employer is not eligible for a refund or credit. However, the employee may file a claim for refund of the overpayment if:
• the employee is not repaid or reimbursed by the employer and does not authorize the employer to file a claim and receive a refund or credit;
• the overcollection cannot be corrected; and
• in the case of overpaid employee social security tax due to receiving wages or compensation from multiple employers, the employee has not taken the overcollection into account in claiming a credit against, or refund of, his or her income tax; or if so, such claim has been rejected.
We can assist you in evaluating the impact of the Medicare surtax on your tax liability and guide you in a developing a tax saving strategy. Please call our office for an appointment.