Press Room: Tax Release

December 10, 2012

Employer Withholding Obligation for New 0.9% Additional Medicare Tax

IRS issued guidance on November 30, 2012, for employers and individuals regarding the new 0.9% additional Medicare tax payable on wages in excess of a threshold amount received after 2012. The guidance is provided through proposed reliance regulations and 47 questions and answers.

The 0.9% additional Medicare tax is applied on wages and net self-employment income in excess of $200,000 ($250,000 for joint returns and $125,000 for married taxpayers filing a separate return). In computing the additional Medicare tax, all wages and net self-employment income are aggregated to determine if the thresholds are exceeded. For example, if a husband and wife who file a joint return each have 2013 wage income of $150,000 for a total of $300,000, then the new 0.9% additional Medicare tax is paid on $50,000 ($300,000 less $250,000).

The 0.9% additional Medicare tax applies only to the individual.  The employer does not match the amount as it does for the regular 1.45% Medicare tax. The employer is required to withhold the additional Medicare tax if it pays an employee wages in excess of $200,000, regardless of the employee’s filing status. Withholding begins only after the employee has received $200,000 in wages. An employer that does not deduct and withhold the additional Medicare tax is liable for the tax unless the tax is paid by the employee. Even if the tax is paid by the employee, the employer may be subject to all applicable penalties.

Wages for purposes of the additional Medicare tax are the same as wages for the existing 1.45% Medicare tax. Wages would include both cash and non-cash wages as well as taxable non-cash fringe benefits. In computing the tax, wages paid by an employer and by a third party paying sick pay will have to be aggregated to determine whether the $200,000 threshold is exceeded. If an employee has amounts deferred under a nonqualified deferred compensation plan and the employer uses the special timing rule for purposes of determining the amount of FICA taxes due on such wages, then the special timing rule would also apply in computing and withholding of the 0.9% additional Medicare tax.

When an employee performs services for multiple subsidiaries of a company and each subsidiary is an employer of the employee, wages paid by the payor on behalf of each subsidiary should combine the wages only if the payor is a common paymaster. The wages are not combined for purposes of the $200,000 withholding threshold if the payor is not a common paymaster. In certain mergers or acquisitions, wages paid by the predecessor are treated as paid by the successor for purposes of applying the additional Medicare tax withholding threshold.

An employee may not request that the 0.9% additional Medicare tax not be withheld nor can the employee who anticipates a liability for the additional Medicare tax specifically request that the employer withhold the 0.9% additional Medicare tax. The employee may, however, file a new Form W-4 to have additional or less income tax withheld from his wages. 

IRS will be modifying the Form 941 to add a line to report the wages in excess of the $200,000 for the year and a line for the 0.9% additional Medicare tax. There will be no change to the Form W-2. The additional Medicare tax will be reported in combination with withholding of regular Medicare tax in box 6.