Additional Medicare Tax on High Earners


•    For tax years beginning after December 31, 2012, the 0.9 percent Additional Medicare Tax applies to employee compensation and self-employment income above certain threshold amounts. The IRS issued proposed reliance regulations in 2012. In the just-released final regulations, the IRS acknowledged that the Additional Medicare Tax imposes new recordkeeping and withholding procedures for employers but rejected suggestions to give employers more time to allow corrections. The IRS explained that existing regs provide flexibility when an employer discovers errors and penalties generally do not apply where failure is due to reasonable cause and not willful neglect.

•    Employee Compensation

The Patient Protection and Affordable Care Act (Affordable Care Act) increased the employee- share of Hospital Insurance (Medicare)by 0.9 percent of FICA wages in excess of certain threshold amounts: $200,000 for single individuals, $250,000 for married couples filing a joint return, and $125,000 for married couples filing separate returns (the amounts are not indexed for inflation).

•    Self-Employed Individuals

For tax years beginning after December 31, 2012, the Additional Medicare Tax increases the Medicare tax on self-employment income by an additional 0.9 percent of self-employment income in excess of the applicable threshold amounts ($200,000/$250,000/$125,000). These amounts are reduced, but not below zero, by the amount of FICA wages taken into account in determining Additional Medicare Tax liability.

•    Employer Withholding

An employer’s withholding obligation for Additional Medicare Tax applies only to the extent the employee’s wages are in excess of $200,000 in a calendar year. The employer may disregard the amount of wages received by the employee’s spouse or from self- employment income or wages received from another employer. Common paymaster rules that determine liability for FICA tax apply.

•    Reporting

Individuals report Additional Medicare Tax on Form 1040, U.S. Individual Income Tax Return. Taxpayers may claim credit for any withheld Additional Medicare Tax on Form 1040 and must pay any tax due not paid through withholding or estimated tax payments.  (Individual income tax returns for 2013 filed in 2014 are the first individual returns to reflect the Additional Medicare Tax.)

•    Employer Liability

If an employer deducts less than the correct amount of Additional Medicare Tax, the employer is liable for the correct amount of tax, unless and until the employee pays the tax. The proposed regulations explained that the tax will not be collected from the employer if the employee pays the tax that the employer failed to deduct. The final regulations clarify that the employer is not relieved of its liability for payment of any Additional Medicare Tax required to be withheld unless the employer can show the employee paid the tax.

•    Employer Over/Underpayments

To correct an overpayment of Additional Medicare Tax, an employer may make an adjustment only if it repays or reimburses the employee prior to the end of the calendar year in which the wages/compensation was paid, the IRS explained. To correct an underpayment of Additional Medicare Tax, an employer may make an interest-free adjustment only if the error is ascertained within the calendar year in which the compensation was paid.