With the implementation of the Additional Medicare Tax in 2013, employers need to be aware of how the tax is calculated, paid and reported. Now that we have entered the second half of the calendar year, more and more employees will reach the threshold set by the IRS.
Employees are liable for the Additional Medicare Tax if their wages exceed certain thresholds, depending on the employees’ tax filing status. For payroll purposes, the IRS states that the employer is to withhold Additional Medicare Tax on wages it pays to an employee in excess of $200,000 in a calendar year. The Additional Medicare Tax is based on the same wages that are subject to the regular Medicare tax. For example, if your employee has $210,000 in gross wages and $25,000 in pre-tax deductions (through a Section 125 Cafeteria Plan), he/she is not yet subject to the tax since the taxable wages equal $185,000. Once taxable wages exceed $200,000, the tax then begins.
Even if you, as the employer, know that the individual will ultimately not be liable for the Additional Medicare Tax when they file their annual return, you are required to take the extra withholding once the $200,000 threshold is met. Any withheld Additional Medicare Tax not due will be credited against the total tax liability shown on the individual’s income tax return.
It is important to note the “employer match” that applies to the regular Medicare Tax does NOT apply to the Additional Medicare Tax. This is an employee-only tax.
The employer is not required to notify employees in advance of taking the Additional Medicare Tax; however, employers may want to consider advance notice to prevent what are certain to be questions from employees about this new tax when it begins appearing on their paystubs. (Savers Admin has prepared an explanation for employees that employers may use when explaining the Additional Medicare Tax to their employees. This document simplifies the information in the IRS Q&A so employees can easily understand the new tax. To receive this, please call 800-949-0311 and request a copy. Please reference this blog post when calling.)
Please be sure to check your payroll calculations and reports as your employees reach the $200,000 threshold. You will want to confirm your payroll software has been upgraded to include this new tax and its proper calculation. In addition, Form 941 now has a new line on which to report this tax. If you find that your payroll software is not reflecting the required changes, you will want to take immediate steps to get it corrected.
For the IRS full Q&A on the Additional Medicare Tax, please visit http://www.irs.gov/Businesses/Small-Businesses-&-Self-Employed/Questions-and-Answers-for-the-Additional-Medicare-Tax.