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The U.S. Internal Revenue Service published proposed Rules Relating to Additional Medicare Tax in the Dec. 5, 2012, Federal Register. The IRS also posted, in plain English, a Q&A for the additional Medicare tax.
Unlike Social Security, the amount of compensation subject to the 1.45 percent Medicare FICA tax is uncapped. However, beginning in 2013, the Patient Protection and Affordable Care Act (PPACA) increases by an additional 0.9 percent—to 2.35 percent—the employee portion of FICA Medicare taxes on wages in excess of $200,000 for an unmarried taxpayer, $250,000 in the case of a joint return and $125,000 in the case of a married taxpayer filing a separate return.
The additional tax differs from the standard Medicare tax in that there is no employer portion to correspond to the additional amount owed by the employee.
By Jan. 1, 2013, U.S. employers should adjust their payroll systems to account for these higher FICA taxes.
Rules Provide Clarification
The proposed rules clarify that calculating wages for purposes of withholding the additional Medicare tax is no different than calculating wages for FICA generally. For example, if an employee has amounts deferred under a nonqualified deferred compensation plan and the nonqualified deferred compensation (NQDC) is taken into account as wages for FICA tax purposes, the NQDC would likewise be taken into account for purposes of determining an employer’s obligation to withhold the additional Medicare tax.
To the extent that the additional Medicare tax is not withheld by the employer, the employee must pay the tax. This, again, is consistent with general FICA rules.
Generally, under the regulations, if an employer discovers an underpayment of FICA with regard to the additional Medicare tax, the employer can make an underpayment adjustment, within the period of limitations, by reporting the additional amount due on an adjusted return for the period in which the compensation was paid.
The IRS will accept written or electronic comments on the proposed rules through March 5, 2013.
Other Income Sources
The additional Medicare tax also applies to high earners' investment income (capital gains and dividends), to be reported and paid as part of their annual income tax filings.
The Q&A posted by the IRS recommends that if employees anticipate that they will owe the additional Medicare tax but will not satisfy the liability through additional withholding—and did not request additional withholding using Form W-4—they may need to make estimated tax payments.
Remind employees to consider their estimated total tax liability in light of their wages and other compensation and income, and the applicable income threshold for their filing status, when determining whether estimated tax payments are necessary.
It's anticipated that employers and corporate boards will take the additional Medicare tax into account when considering the size of pay increases for executives and other high earners, and the result could be pressure for larger increases to offset the higher taxes.
Stephen Miller, CEBS, is an online editor/manager for SHRM.
Year-End Pay and Benefits Issues to Address by Dec. 31, SHRM Online Compensation, December 2012
Year-End Brings Changes to Employee Tax Provisions,SHRM Online Benefits, December 2012
Wages Subject to Social Security Tax to Increase in 2013, SHRM Online Compensation, October 2012
For 2013, New Medicare Taxes on High Earners Pose Challenges, SHRM Online Compensation, July 2012
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