Additional Medicare Tax Goes into Effect in 2013

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The IRS has issued guidance on the new rules that impose an additional 0.9% Medicare tax on wages and self-employed income above a threshold amount received in tax years beginning after Dec. 31, 2012.  The guidance comes in the form of 47 pages of Regulations.  The new tax is in addition to the regular Medicare rate of 1.45% on wages received by employees with respect to employment. The tax only applies to the employee portion of the Medicare tax. The employer Medicare tax rate remains at 1.45%, and the employer and employee Social Security tax remain at 6.2%.

Employer.  For 2013, an employer pays a 7.65% FICA tax, consisting of:

    6.20% Social Security tax on the first $113,700 of an employee's wages, plus
    1.45% Medicare tax on the employee's total wages.

Employee.  For 2013, an employee pays:

    6.20% Social Security tax on the first $113,700 of wages, plus
    1.45% Medicare tax on the first $200,000 of wages ($250,000 for joint returns), plus
    2.35% Medicare tax on all wages in excess of $200,000 ($250,000 for joint returns).

Self-Employed.  For 2013, the self-employment tax imposed on self-employed people consists of:

    12.40% OASDI on the first $113,700 of self-employment income, plus
    2.90% Medicare tax on the first $200,000 of self-employment income ($250,000 for a joint return), plus
    3.80% on all self-employment income in excess of $200,000 ($250,000 for a joint return).

Withholding.  Employers must withhold the additional Medicare tax from wages in excess of $200,000 regardless of filing status or other income. The employer need not notify the employee that additional withholding has commenced. Where a payment to an employee causes him to exceed the $200,000 threshold, the additional withholding tax applies only to the portion of the payment that exceeds the threshold.   The 0.9% additional Medicare tax may be owed on the employee's income tax return where withholding is not collected for it.  For example, the employee would have to pay the additional tax with his or her income tax if the employer failed to withhold.  The employee would also have to pay the additional tax if husband and wife both have wages below $200,000, but together are in excess of $250,000.

Various Benefits Subject to the Additional Tax.  The additional Medicare tax applies to “wages” in excess of the thresholds.  But the regulations make it clear that “wages” include not just cash compensation from the employer, but also taxable noncash fringe benefits, group term life insurance in excess of $50,000, nonqualified deferred compensation, tips and other forms of employee fringe benefits.

Self-employed Persons Who also have Wages.  Calculating the additional Medicare tax for taxpayers (single or joint) who have both self-employment income and wages is a bit bore complex.  Such taxpayers calculate their liabilities for the additional Medicare tax as follows:

    Calculate the additional tax on wages over the applicable threshold for their filing status.
    Reduce the applicable threshold for their filing status by the amount of wages received.
    Calculate the additional Medicare tax on self-employment income over the reduced threshold.

If you have any questions about the additional Medicare tax that will be imposed starting January 1, 2013, please call or email me at 937-223-1130 or Jsenney@pselaw.com.

AND ONE MORE THING.    The IRS has also released rules for the additional investment income surtax that was passed Congress as part of the 2010 healthcare reform law.  The 3.8 percent surtax on investment income goes into effect in 2013 and applies only to capital gains and dividend income.  It is unclear how rental income will be treated under the new rules.  The surtax affects only individuals with more than $200,000 in modified adjusted gross income (MAGI), and married couples filing jointly with more than $250,000 of MAGI.   More on this in a future blog.  If you have questions or comments on the new 3.8% surtax, please give us a call at 937-223-1130 or Jsenney@pselaw.com.