Under the Affordable Care Act (ACA), workers earning more than $200,000 a year ($250,000 for joint filers) must pay higher Medicare hospital insurance (HI) taxes beginning in 2013. The new tax is 2.35% (an increase of 0.9%) of applicable wages above those thresholds, so a worker earning $300,000 a year will pay Additional Medicare Taxes of 1.45% on $200,000 plus 2.35% on $100,000. There is no change to the employer’s share of the Medicare Tax.
The Additional Medicare Tax for high-wage earners will raise roughly $87 billion over 10 years, according to the Congressional Research Service Report for Congress. The Medicare taxes are intended to help pay for health insurance tax credits. Here are FAQs on the Additional Medicare Tax for high-earners, provided by the IRS.
General FAQs on the Additional Medicare Tax
When did Additional Medicare Tax start?
Additional Medicare Tax went into effect in 2013 and applies to wages, compensation, and self-employment income above a threshold amount received in taxable years beginning after Dec. 31, 2012.
What is the rate of Additional Medicare Tax?
The rate is 0.9 percent.
When are individuals liable for Additional Medicare Tax?
An individual is liable for Additional Medicare Tax if the individual’s wages, compensation, or self-employment income (together with that of his or her spouse if filing a joint return) exceed the threshold amount for the individual’s filing status:
|Married filing jointly||$250,000|
|Married filing separate||$125,000|
|Head of household (with qualifying person)||$200,000|
|Qualifying widow(er) with dependent child||$200,000|
What wages are subject to Additional Medicare Tax?
All wages that are currently subject to Medicare Tax are subject to Additional Medicare Tax if they are paid in excess of the applicable threshold for an individual’s filing status. For more information on what wages are subject to Medicare Tax, see the chart, Special Rules for Various Types of Services and Payments, in section 15 of Publication 15, (Circular E), Employer’s Tax Guide.
Are nonresident aliens and U.S. citizens living abroad subject to Additional Medicare Tax?
There are no special rules for nonresident aliens and U.S. citizens living abroad for purposes of this provision. Wages, other compensation, and self-employment income that are subject to Medicare tax will also be subject to Additional Medicare Tax if in excess of the applicable threshold.
Will I also owe net investment income tax on my income that is subject to Additional Medicare Tax?
No. The tax imposed by section 1411 on an individual’s net investment income is not applicable to wages, RRTA compensation, or self-employment income. Thus, an individual will not owe net investment income tax on these categories of income, regardless of the taxpayer’s filing status.
Employer and Payroll Provider Responsibility FAQs
Employers must withhold the additional 0.9% Medicare tax (Form W-2, box 5) regardless of the employee’s tax filing status or marital status. Payroll departments and vendors will need to make the necessary administrative adjustments to comply.
As employers will calculate the additional 0.9% Medicare payroll tax based on the employee’s income, a married couple’s combined income could exceed the $250,000 threshold even though their respective employers did not withhold the tax. These couples will be responsible for filing and paying the additional tax themselves on their Form 1040. Here's are FAQs for employers and payroll service providers.
When must an employer withhold Additional Medicare Tax?
Effective Jan. 1, 2013, an employer must withhold Additional Medicare Tax on wages it pays to an employee in excess of $200,000 in a calendar year. An employer has this withholding obligation even though an employee may not be liable for Additional Medicare Tax because, for example, the employee’s wages together with that of his or her spouse do not exceed the $250,000 threshold for joint return filers. Any withheld Additional Medicare Tax will be credited against the total tax liability shown on the individual’s income tax return (Form 1040).
Is an employer liable for Additional Medicare Tax even if it does not withhold it from an employee’s wages?
An employer that does not deduct and withhold Additional Medicare Tax as required is liable for the tax unless the tax that it failed to withhold from the employee’s wages is paid by the employee. An employer is not relieved of its liability for payment of any Additional Medicare Tax required to be withheld unless it can show that the tax has been paid by filing Forms 4669 and 4670. Even if not liable for the tax, an employer that does not meet its withholding, deposit, reporting, and payment responsibilities for Additional Medicare Tax may be subject to all applicable penalties.
Is an employer required to notify an employee when it begins withholding Additional Medicare Tax?
No. There is no requirement that an employer notify its employee.
Is there an “employer match” for Additional Medicare Tax (as there is with the regular Medicare tax)?
No. There is no employer match for Additional Medicare Tax.
May an employee request additional withholding specifically for Additional Medicare Tax?
No. However, an employee who anticipates liability for Additional Medicare Tax may request that his or her employer withhold an additional amount of income tax withholding on Form W-4. This additional income tax withholding will be applied against all taxes shown on the individual’s income tax return (Form 1040), including any Additional Medicare Tax liability.
If an employee requests that I stop withholding Additional Medicare Tax from wages in excess of the $200,000 withholding threshold, because the employee and spouse file a joint return and won't meet the $250,000 threshold for joint filers, should I stop withholding Additional Medicare Tax?
No. As an employer, you must withhold Additional Medicare Tax on wages you pay to your employee in excess of the $200,000 withholding threshold in a calendar year. You cannot honor a request to cease withholding Additional Medicare Tax because you are required to withhold it. Your employee will claim credit for any withheld Additional Medicare Tax against the total tax liability shown on their individual income tax return (Form 1040).
If an employee’s annual Medicare wages are expected to be over $200,000, will an employer withhold Additional Medicare Tax from the beginning of the year or only after Medicare wages are actually paid in excess of $200,000 year-to-date?
An employer is required to begin withholding Additional Medicare Tax in the pay period in which it pays wages in excess of $200,000 to an employee.
The IRS has provided detailed Q&As and examples on the new tax. Click here to read more FAQs from the IRS on the Additional Medicare Tax for high earners.