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Smart Benefits: Will You Be Affected by the New Medicare Tax?

Monday, December 09, 2013

 

The self-employed, small businesses and high earners should be having a little more withheld from their paychecks this year because of the additional Medicare tax (AMT) withholding stemming from healthcare reform. But while this law went into effect January 1, 2013, lots of questions since have prompted the IRS to publish final regulations on November 29, 2013.

2013 Medicare Tax Law

Key points in the final regulations include:

  • The requirement applies to all employers, regardless of size or grandfathered status. Private, government and not-for-profit employers all must withhold the tax from these individuals.
  • The employer must withhold an additional 0.9 percent of the employee's share for Medicare/Hospital Insurance (from 1.45 percent to 2.35 percent) once the employee's wages exceed $200,000.
  • The employer is not required to - and should not - match this additional 0.9 percent.
  • The additional 0.9 percent is not capped.
  • The additional withholding applies to wages over $200,000, beginning in the pay period the $200,000 threshold is met.
  • Married employees must be treated as separate individuals. All wages that are currently subject to Medicare tax are also subject to the AMT (such as imputed income).
  • The additional amount withheld for AMT will be reported with other Medicare withholding in Box 6 of the W-2.
  • The AMT withheld will be reported on a new line 5d on Form 941, 941-PR or 941-SS. "Regular" Medicare tax should be reported on line 5c.
  • There is no obligation to notify high earners of the additional withholding.
  • A similar requirement applies to self-employed taxpayers once their income exceeds $200,000. If the taxpayer has both wages and self-employment income, these amounts are combined.
  • Wages of employees who work for related employers are combined only if the employers use a common paymaster.
  • The final regulations clarify that, in general, over-withholding or under-withholding of the AMT should be handled the same as over-withholding or under-withholding of any other payroll tax. Employer-initiated corrections must occur within the same calendar year as the incorrect withholding; if the correction cannot be made during the current calendar year, the employee typically will need to make the correction through an amended income tax return (Form 1040X).

 

Medicare Withholding

The employer is required to withhold on wages over $200,000 for all tax situations, meaning, the employee will owe the 0.9 percent AMT on wages and other compensation over:

  • $200,000 if filing as a single individual
  • over $250,000 if married and filing jointly
  • over $125,000 if married and filing single

 

Below are examples of how the withholding applies:

  • Joe is married and earns $225,000 in 2013. Joe's wife is not employed, so Joe's household income is below $250,000. Even though Joe will not ultimately owe any additional Medicare tax, Joe's employer must withhold the additional 0.9 percent once his 2013 pay reaches $200,000. The additional amount withheld will be credited/refunded to Joe when he files his federal income tax return.
  • Jane is single and earns $180,000 in 2013. She will owe the AMT on her federal income tax because her income is over $125,000. However, Jane's employer cannot withhold AMT for Jane because her income is below the $200,000 threshold. Jane may request that her employer withhold additional amounts by filing a W-4.

 

This AMT tax should not be confused with another new Medicare tax, which does not involve the employer at all. That 3.8 percent tax is payable on the lesser of the taxpayer's net investment income and modified adjusted gross income over the levels described above.

 

Amy Gallagher has over 21 years of healthcare industry experience guiding employers and employees. As Vice President at Cornerstone Group, she advises large employers on all aspects of healthcare reform, benefit solutions, cost-containment strategies and results-driven wellness programs. Amy speaks regularly on a variety of healthcare-related topics, and is often quoted by national publications on the subject matter. Locally, Amy is a member of SHRM-RI, the Rhode Island Business Group on Health, and the Rhode Island Business Healthcare Advisory Council.

 

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