The IRS recently released proposed regulations (REG-130074-11) on the new 0.9% additional Medicare tax (Additional Medicare Tax) added by the Patient Protection and Affordable Care Act of 2010.
Beginning in 2013, the Additional Medicare Tax applies to wages earned by employees and self-employment income earned by independent contractors and other self-employed individuals, in excess of certain thresholds. The threshold amount for married individuals filing jointly is $250,000 ($125,000 if they file separate returns), and $200,000 for single individuals.
Employers are obligated to withhold the Additional Medicare Tax from an employee's wages to the extent that the employee's wages exceed $200,000. The proposed regulations direct employers to ignore the employee's filing status (i.e., whether the employee is married or single), other income earned by the employee and wages earned by the employee's spouse. For this purpose, an employee's wages are calculated the same as they would be for regular Medicare and Social Security tax. For example, nonqualified deferred compensation generally can be included in wages for regular Medicare tax and the Additional Medicare Tax in the year the deferred compensation becomes vested, regardless of whether it is paid later. The employer's share of Medicare tax remains at 1.45% and does not increase by the 0.9% Additional Medicare Tax.
Employers will report the Additional Medicare Tax that was withheld from the employee's wages on the employee's Form W-2 for the year the wages were earned. The IRS does not plan to change the Form W-2, so the Additional Medicare Tax should be reported in box 6 of Form W-2. The IRS does plan to change Form 941, Employer's Quarterly Federal Tax Return, to add a line on which employers will report any individual's wages paid during the quarter that exceed $200,000 for the year, and on which employers will report their withholding liability for Additional Medicare Tax on those wages. The proposed regulations also include specific rules for correcting situations in which the employer over- or under-withheld Additional Medicare Tax. Corrections can be made, however, only during the year the wages became subject to the Additional Medicare Tax (i.e., employers cannot make corrections in years subsequent to the year the employer should have withheld the tax).
The self-employment tax that applies to individuals who receive earnings from self-employment exceeding the applicable threshold amount increases by 0.9%, and those individuals may be required to pay additional estimated taxes during the year to cover the Additional Medicare Tax. If an individual receives wages from employment and earnings from self-employment, the applicable threshold amount for self-employment tax is reduced by the wages earned by the individual. For example, an unmarried individual who receives $130,000 of wages and $145,000 of self-employment income is required to pay the Additional Medicare Tax on $75,000 of self-employment income (only $75,000 of the self-employment income exceeds the $200,000 threshold after accounting for $130,000 in wage income).
The IRS also issued Questions and Answers for Additional Medicare Tax.
The IRS intends to finalize the proposed regulations in 2013. The regulations are proposed to be effective on the date the final regulations are published in the Federal Register. Taxpayers may rely on the proposed regulations for tax periods that begin before the date the final regulations are published in the Federal Register. Even though these regulations are not final, the Additional Medicare Tax and an employer's obligation to withhold this tax apply to all wages and self-employment income earned on or after Jan. 1, 2013.
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