The Affordable Care Act adds an additional hospital insurance tax on income above certain amounts (the Additional Medicare Tax). The IRS recently released guidance for employers about the implementation of the Additional Medicare Tax.
Withholding
- An employer must withhold Additional Medicare Tax on wages it pays in excess of $200,000 in a calendar year.
- An employer that does not deduct and withhold Additional Medicare Tax as required is liable for the tax unless the employee paid the tax.
- There is no employer match for the Additional Medicare Tax.
Reporting
- When an employer deposits Additional Medicare Tax through the Electronic Federal Tax Payment System (EFTPS), it does not need to separate the Additional Medicare Tax from the regular Medicare tax. The regular Medicare tax and Additional Medicare Tax are entered as one combined amount.
- A new line 5d has been added to Form 941, Form 941-PR and Form 941-SS on which employers report any individual’s wages paid during the quarter that is in excess of the $200,000 and the withholding liability for Additional Medicare Tax on those wages.
Adjusting Underpayments and Overpayments
- If an employer does not withhold the correct amount of Additional Medicare Tax from wages and the error is discovered in the same year as the wages are paid, the employer may correct the error by making an interest-free adjustment on the corrected return.
- If an employer withholds too much Additional Medicare Tax and discovers the error in the same year the wages are paid, the employer may correct the error by making an interest-free adjustment on the appropriate corrected return. The employer must repay or reimburse the over-withheld amount to the employee prior to the end of the calendar year in which it paid the wages.
Employers should confirm that their payroll systems are equipped to capture and process the additional tax amounts.
