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How Does the Additional Medicare Tax Affect Payroll Accounting?

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Question: How Does the Additional Medicare Tax Affect Payroll Accounting and Payroll Taxes?

Answer:

The Tax Relief for Americans Act of 2013, signed into law on January 2, 2013, included a provision to increase Medicare taxes for higher-income individuals (both employees and self-employed business owners), for income above a specific level. The additional tax rate is 0.9%; this additional Medicare tax is applied for income over a specific level, depending on the individual's federal income tax filing status.

The additional Medicare tax is based on the income filing status and income level of the employee:

  • Married filing jointly - $250,000
  • Married filing separately - $125,000
  • Single - $200,000
  • Head of household (with qualifying person) - $200,000
  • Qualifying widow(er) with dependent child - $200,000

 

Additional Medicare Tax Withholding
Medicare taxes are paid by all employees and self-employed individuals as part of FICA taxes (which include both Medicare taxes and Social Security (OASDI) taxes. The Medicare tax rate is 1.45% and this rate is applied to all employee wages; there is no maximum wage limit for Medicare taxes, as there is for Social Security taxes. The IRS says:

An employer must withhold Additional Medicare Tax from wages it pays to an individual in excess of $200,000 in a calendar year, without regard to the individual’s filing status or wages paid by another employer.
For example, an employer must withhold the additional Medicare Tax 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.

 

Employers are NOT required to pay an amount equal to the Additional Medicare Tax; there is no employer match for the Additional Medicare Tax. Employers, therefore, are only required to match employee Medicare taxes up to $200,000 in employee wages.

Employer responsibility to withhold the additional Medicare tax amount begins with the first paycheck for each employee that exceeds $200,000 in wages and tips for the year.

Employees who owe more than the amount of Medicare tax withheld from their paychecks must make up the difference, either by (a) estimated tax payments, or (b) changing their withholding amount on Form W-4.

If an employee owes less than the amount of Medicare tax withheld by the employer, the IRS says the employer may not decrease the amount of Medicare tax withholding, but must withhold Additional Medicare Tax on all wages it pays in excess of $200,000 in a calendar year. Employers cannot honor employee requests to cease withholding Medicare tax. The employee will have to wait until his or her personal tax return is filed to show the amount of over-withholding.

As an example of how the additional Medicare tax is applied, an individual with a filing status of Single who earns $300,000 in 2013 would pay Medicare tax:

  • $300,000 times 1.45% =$4350.00, plus
  • $100,000 in additional Medicare tax times 0.9% = $900
  • For a total of $5250 in Medicare tax for 2013.

 

Payroll Accounting and the Additional Medicare Tax
The first thing employers must do is to change payroll accounting software or make sure payroll services are changed, (a) to monitor employee wages to trigger the additional Medicare tax (the additional 0.9%) and (b) to begin withholding the additional amount at the point where the additional Medicare tax is due.

You may want to notify employees when the additional Medicare Tax begins to be withheld, although the IRS says there is no legal requirement that you must notify employees of this additional withholding.

Third, additional Medicare tax withholding for all high income employees must be accumulated and included in payroll tax deposits which are made either semi-weekly or monthly, depending on the size of the payroll.

Additional Medicare Tax and Form 941
Beginning with the first quarter of 2013, payroll tax reports on Form 941 must be completed to include any additional Medicare tax withholding for higher income employees who have reached the point where additional Medicare taxes are being withheld.

To complete Form 941 forms each quarter of 2013, employers must include total all employee income subject to additional Medicare tax withholding on Line 5d, Column 1, then multiply this amount by 0.009, to calculate total amount of additional Medicare tax due to the IRS.

 

Read more details and answers to more specific questions on the IRS website about the Additional Medicare Tax

 

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