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Highlights of Additional Medicare Withholding for High Earners

Source: United Benefit Advisors

  • Effective Jan. 1, 2013
  • Applies to all employers
  • Employer must withhold an additional 0.9 percent of the employee’s share for Medicare/HI (from 1.45 percent to 2.35 percent) once the employee’s wages exceed $200,000
    • Employer does not match this additional 0.9 percent
    • Additional 0.9 percent is not capped
    • Additional withholding applies to wages over $200,000, beginning in the pay period the $200,000 threshold is met
      • Married employees must be treated as separate individuals
        • Example: Bob and Beth both work for Acme. They each make $150,000. Even though they will owe the additional Medicare tax (AMT) because their household income exceeds $250,000, Acme should not withhold AMT because neither individually earns over $200,000. (Bob and Beth can request additional withholding by filing a W-4.)
    • Employee’s tax obligation is not synchronized with the withholding requirement
      • Employee owes the extra 0.9 percent on wages and other compensation over $200,000 if single, $250,000 if married and filing jointly, and $125,000 if married and filing single, but the employer must withhold on wages in excess of $200,000 regardless of employee’s situation
      • Examples:
        • Joe is married and earns $225,000 in 2013. Joe’s wife is not employed, so Joe’s household income is below $250,000. Even though Joe will not ultimately owe any additional Medicare tax, Joe’s employer must withhold the additional 0.9 percent once his 2013 pay reaches $200,000. The additional amount withheld will credited/refunded to Joe when he files his federal income tax return.
        • Jane is married, files separately and earns $180,000 in 2013. She will owe the AMT on her federal income tax because her income is over $125,000. However, Jane’s employer cannot withhold AMT for Jane because her income is below the $200,000 threshold. Jane may request that her employer withhold additional amounts by filing a W-4.
    • All wages that are currently subject to Medicare tax are also subject to the AMT (such as imputed income)
    • Additional withheld amount will be reported with other Medicare withholding in Box 6 of the W-2
    • No obligation to notify high earners of additional withholding
    • Similar requirement applies to self-employed once their income exceeds $200,000
    • Errors in withholding are corrected the same way errors in withholding federal income tax are corrected
    • Wages of employees who work for related employers are combined only if the employers use a common paymaster

Action Needed:

  • Verify payroll system/payroll vendor is prepared to withhold the additional tax as needed beginning January 2013
  • Consider advising affected employees that:
    • Additional withholding will occur
    • Withholding is a rough estimate of the actual household tax obligation, and they should review their circumstances, including estimated tax payments, and plan accordingly

Additional information is available at:

Proposed Rule – Additional Medicare Tax

Questions and Answers for the Additional Medicare Tax

Note:  There is another new Medicare tax on high earners that imposes no obligation on employers. A 3.8 percent tax is payable on the lesser of the taxpayer’s net investment income and modified adjusted gross income over the levels described above. Net investment income excludes wages, self-employment income, distributions from IRA’s and qualified plans, and tax-exempt interest and dividends.  It includes dividend and interest income, annuities, royalties and rents unless derived in the ordinary course of business, net gains on the disposition of property, and income from a variety of other passive activities. The capital gain from selling a principal residence is considered net income to the extent it exceeds the excludable amount ($250,000 if single or $500,000 if married and filing jointly).