The Patient Protection and Affordable Care Act of 2010 – commonly referred to as Obamacare or the ACA – included two provisions related to the Medicare tax which took effect in 2013. Today we’ll look at the 0.9% increase to Medicare tax for high-wage earners. In a future post we’ll cover the 3.8% Medicare surtax on investment income.
OLD LAW
Before 2013, Medicare was one of the simpler taxes. Employers withheld 1.45% from each employee’s wages. The employer paid a matching 1.45%, for a total of 2.9%. There was no floor, no ceiling, and few adjustments to gross wages. Self-employed individuals paid a corresponding 2.9% (both the employee’s and employer’s portions) on Schedule SE with their 1040 each year. These rules were in effect through December 31, 2012.
THE ADDITIONAL MEDICARE TAX
Beginning in 2013, wages and self-employment income over certain thresholds will be subject to an additional 0.9% Medicare tax. The thresholds are:
Married filing joint – $250,000
Married filing separate – $125,000
All others – $200,000
The thresholds apply to the total of all compensation subject to Medicare received from all employers during the year, plus self-employment income. For married filing joint, the threshold is applied to the total compensation and SE income for the couple.
EMPLOYER RESPONSIBILITIES
First note that, unlike the existing 1.45% Medicare tax, there is no employer match on the additional 0.9% tax. The tax is on the employee only.
The employer does have withholding responsibilities. These are pretty simple. When an employee reaches compensation of $200,000 in the year, the employer begins withholding the additional 0.9% and continues for the rest of the year. That’s it. It doesn’t matter if the employee has another job, or a spouse with income, or a spouse with no income. The employer withholds an additional 0.9% on compensation over $200,000 in all these cases.
IS YOUR WITHHOLDING SUFFICIENT?
Not necessarily. Because the employer is not required (or allowed) to consider your individual circumstances, your withholding could be high, low, or just right. Let’s look at some examples:
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EXAMPLE 1 – WITHHOLDING IS JUST RIGHT
Bob is single, has one job and no self-employment income, and earns $240,000 in 2012.
Bob’s employer starts withholding the additional 0.9% when his income reaches $200,000. The total withheld is $360 ($40,000 X .009).
Bob is a single filer, so his threshold is $200,000. His additional Medicare tax for the year is $360. Bob will calculate this tax on his Form 1040, and will get credit for the $360 withheld by his employer.
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EXAMPLE 2 – WITHHOLDING IS TOO HIGH
Let’s keep the same facts as Example 1, except this time Bob is married and files a joint return. His wife has no compensation or SE income.
Bob’s employer withholds the same $360 as in Example 1. The employer cannot adjust the withholding based on Bob’s filing status or other circumstances.
However, as a joint filer, the threshold is $250,000. Bob’s total compensation is only $240,000. Bob has no additional Medicare tax liability for the year. He will get credit on his Form 1040 for the $360 withheld by his employer. This will decrease his amount due or increase his refund.
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EXAMPLE 3 – WITHHOLDING IS TOO LOW
Steve changes jobs partway through the year. His Medicare wages from his first employer were $140,000. His wages from his second employer were $160,000. Steve is single and has no self-employment income.
Steve’s wages subject to the additional Medicare tax are $100,000 ($140,000 plus $160,000 less the threshold of $200,000 for a single filer), and his additional Medicare tax liability is $900.
However, neither of Steve’s employers withheld additional Medicare tax from Steve’s paychecks because he did not earn over $200,000 with either employer.
Steve will calculate the $900 liability on his Form 1040. This will increase his amount due or decrease his refund.
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EXAMPLE 4 – WITHHOLDING IS TOO LOW
Jane and Fred are married and filing a joint return. Jane has compensation of $190,000. Fred has compensation of $160,000.
Neither Jane nor Fred had additional Medicare tax withheld from their paychecks because neither one earned over $200,000 for the year.
But, their income subject to the tax is $100,000: combined income of $350,000 less the $250,000 threshold for married filing joint. Their tax liability calculated on their 1040 will be $900.
WHAT YOU CAN DO
If you think you might be affected by the additional Medicare tax and don’t want a surprise tax bill next April, give us a call. We can estimate your tax liability and if necessary prepare quarterly estimates or help you adjust your W-4 to change your withholding.
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