Additional 0.9% Medicare tax on earned income.

• Author: Ellentuck, Albert B.

UNDER THE 2010 PATIENT PROTECTION and Affordable Care Act, P.L. 111-148, beginning in 2013, individuals must pay an additional 0.9% Medicate tax on earned income above certain thresholds. This tax applies to both wage income and self-employment (SE) income. The IRS has issued proposed regulations regarding the additional 0.9% Medicare tax that can be relied on until final regulations are published. It has also issued a set of frequently asked questions (FAQs) (available at tinyurl.com/8dx6yhc) that are not authoritative guidance but do provide insight into how the IRS plans to administer the new tax.

Imposition of Tax on Wages and Other Compensation

Beginning in 2013, the employee portion of the Medicare tax is increased from 1.45% to 2.35% on wages received in a calendar year in excess of $200,000 ($250,000 for married couples filing jointly; $125,000 for married filing separately) (Sec. 310 I (b)(2)). Employers must withhold and remit the increased employee portion of the Medicare tax for each employee whose wages for Medicare tax purposes from the employer are over $200,000 (Sec. 3102 (f) (1)).

All wages subject to the 1.45% Medicare tax, including taxable noncash fringe benefits and nonqualified deferred compensation, are subject to the 0.9% additional Medicare withholding tax and are taken into account in determining the $200,000 threshold for withholding purposes (IRS FAQs No. 32 and No. 36).

Employer Responsibilities

The employer must begin withholding the additional 0.9% Medicare tax in the pay period in which the employee's calendaryear wages subject to Medicare tax exceed $200,000, regardless of the employee's filing status or other income. Withholding is required even if the employee will not be subject to the tax because his or her wages, when combined with a spouse's wages, will not exceed the $250,000 married-filing-jointly threshold (Prop. Regs. Secs. 31.3102-4 (a) and 31.3202-1 (g); IRS FAQs No. 8, No. 15, and No. 24).

Example 1: J, a single individual, works for T Inc. T pays J $250,000 in 2013, and he has no other earned income. Because J's total wages in 2013 are more than $200,000, he must pay an additional 0.9% Medicare tax on the wages over $200,000 (i.e., on $50,000). J's total additional Medicare tax is $450 ($50,000 x 0.009). T must withhold an additional 0.9% Medicare tax from J's salary beginning with the paycheck in which his annual Medicare wages exceed $200,000. The additional taxes are remitted with Ts other...