The Internal Revenue Service recently released final regulations and updated questions and answers to help employers and taxpayers comply with the new 0.9 percent Medicare payroll tax increase on high-income earners that became effective in 2013. Employers are responsible for withholding and reporting the increased payroll tax and may be liable for amounts that are not withheld. Employers should check with their payroll service providers to make sure they are compliant for 2013 and, if not, make any necessary corrections by the last payroll of 2013 to avoid potential liability or penalties.

The Internal Revenue Service (IRS) recently issued final regulations relating to the additional Hospital Insurance (HI) tax on income above threshold amounts (the Additional Medicare Tax), as added by the Affordable Care Act. The IRS also issued updated Questions and Answers for the Additional Medicare Tax. Employers are responsible for withholding and reporting the 0.9 percent Additional Medicare Tax, which became effective in 2013. If an employer fails to withhold the correct amount from wages it pays to an employee, the employer may be liable for the amount not withheld and subject to applicable penalties.

Background

In general, employees and their employers must each pay a Medicare tax, at a rate of 1.45 percent, on the entire amount of the employees’ wages. Effective for employees beginning in 2013, the 0.9 percent Additional Medicare Tax is imposed on individuals for wages in excess of $250,000 for married taxpayers filing jointly, $125,000 for married taxpayers filing separately and $200,000 for single taxpayers. Thus, for high-wage earners, the employer portion of the Medicare tax remains at 1.45 percent, but the employee portion can be a total of 2.35 percent of wages in excess of the threshold amounts.

Employer Obligations

To comply with the Additional Medicare Tax requirement, employers must withhold the 0.9 percent Additional Medicare Tax from wages it pays to an employee in excess of $200,000 in a calendar year, without regard to the employee’s filing status, wages paid by another employer or income from self-employment. Thus, generally the employer need not obtain additional information from the employee regarding the employee’s expected actual liability to withhold amounts due under the Additional Medicare Tax. Note that the withholding obligation exists even if an employee is not ultimately liable for the Additional Medicare Tax (e.g., if an employee’s wages together with those of his or her spouse do not exceed the $250,000 for married taxpayers filing jointly). On the other hand, an employer is not required to withhold the Additional Medicare Tax so long as the employee’s wages do not exceed $200,000, even if the employer has reason to believe the employee will be liable for the Additional Medicare Tax (e.g., if an employee and his or her spouse each earn $150,000). Employers are required to begin withholding Additional Medicare Tax in the pay period in which the employer pays wages in excess of $200,000 to an employee.

Employers that do not deduct and withhold the Additional Medicare Tax are [...]

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