The Affordable Care Act increased the Medicare Part A payroll tax rate for certain individuals. The change under health care reform increases the rate from 1.45% to 2.35% of earnings over
- $200,000 for individuals,
- $125,000 for married couples filing separately, and
- $250,000 for married couples filing jointly.
The additional Medicare tax applies to wages, compensation, and self-employment income received in tax years beginning after December 31, 2012, and employers must begin to withhold the additional tax on wages it pays to an employee in excess of $200,000 beginning January 1, 2013. The IRS issued a proposed rule and Frequently Asked Questions addressing the increased Medicare tax.
According to the IRS, the additional tax applies to individuals, only, and not to employer payroll amounts. Employers are responsible for withholding the tax when employees reach the appropriate pay level. When determining the compensation amount above which withholding must begin, all wages that are subject to Medicare tax are subject to the tax increase if they are paid in excess of the applicable threshold for the employee's filing status. Employers are not, however, required to consider a spouse's wages and must apply the additional tax to amounts the any employee receiving more than $200,000 in wages for a calendar year. Tips and non-cash fringe benefits are included in "compensation" for the determination if the additional tax applies.
If an employee will owe additional Medicare tax but will not satisfy the tax amount through withholding (and did not request additional withholding on Form W-4), the employee may have to make estimated tax payments. Individuals will have to calculate the additional Medicare tax liability on their individual income tax returns for the year.
While there is no employer match for the additional Medicare tax as there is for the regular Medicare tax, an employer that does not deduct and withhold the applicable amount is responsible for the tax if the employee fails to pay. An employer that does not meet its withholding, deposit, reporting, and payment responsibilities for tax may also be subject to IRS penalties. The IRS will revise Forms 941 and 943 for proper reporting.
Employers should review their payroll systems early this year to make sure they are ready to withhold the proper amounts for the additional Medicare tax when employees hit the dollar limit thresholds.
