Snyder and Associates

 

Tax Byte

Additional Medicare Tax on Wages and Earned Income

In our July TaxByte, we noted several of the tax provisions that will go into effect in 2013 as a result of the health care reform legislation (the Affordable Care Act of 2010).  In this TaxByte, we want to provide additional guidance on the Medicare tax increase on earned income (in a separate TaxByte, we will explore the Medicare surtax on investment income).

 

Starting on January 1, 2013, employees making over $200,000 in compensation or self-employment income ($250,000 for married couples) will be subject to an additional 0.9% Medicare tax.  Employers will not have to match this amount, as is done with regular Medicare tax; however, employers will be required to withold the additional amount once an employee's compensation exceeds $200,000.  The employer does not consider the compensation of the employee's spouse in determining when to withhold the additional 0.9%. 

 

The following example helps to explain the scenario where one spouse's compensation exceeds the threshold and the other does not.

 

Example:  If Bill has wages of $225,000 and Kay, his wife, has wages of $100,000, Kay's employer is not required to withhold any portion of the additional tax, even though the combined wages of Bill and Kay are over the $250,000.  Bill's employer, however, is required to withhold the additional 0.9% Medicare tax on $25,000 of his wages - the amount above the $200,000 threshold.  When Bill and Kay file their tax return, they will have additional Medicare tax owed, calculated as follows:

 

Total Wages:  $325,000
Threshold:   $250,000
Excess:  $ 75,000
  x     0.9%
Additional Medicare Tax:  $      675
Less:  amount withheld:  $       225 ($25,000 x 0.9%)
Additional owed with return $       450

 

The IRS has added a questions and answers page to help with the implementation of the additional Medicare tax, which can be accessed through the following link:

http://www.irs.gov/Businesses/Small-Businesses-&-Self-Employed/Questions-and-Answers-for-the-Additional-Medicare-Tax

 

In case you are wondering, the additional Medicare tax does further exacerbate the "marriage penalty" that exists in federal taxes.  Two single individuals with $150,000 each in compensation would not be subject to the additional Medicare tax; however, if they married, they would pay an additional $450 in Medicare taxes.

 

As always, if you have any questions, please give us a call.

 

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