IRS provides answers on the new 0.9% Medicare tax

To pay for health care reform, high earners—single employees earning more than $200,000 and joint ­filers earning more than $250,000—will pay an additional 0.9% in Medicare taxes, for a total tax rate of 2.35%, beginning Jan. 1, 2013.

Good news: Employers don’t match the 0.9% tax.

Now the IRS has issued “Questions and Answers for the Additional Medicare Tax” to provide guidance. Access the document here.

0.9% solution

For withholding purposes, you must treat all high earners as single. Impact: Some married employees may be underwithheld; they may refile their W-4s to request that additional income taxes be withheld from their pay. Flip side: Other married employees may be overwithheld. Everything will be reconciled when employees file their 1040s.

The 0.9% additional tax applies only to the portion of an employee’s wages that actually exceeds $200,000. So, for example, if Max earns $180,000 and he gets a $50,000 bonus, you withhold the 0.9% from the $30,000 excess and from Max’s pay for the remainder of the year.

It’s just like regular Medicare tax, mostly

The IRS notes that the same basic rules that apply to the regular 1.45% Medicare tax apply to the additional tax. For example, if a high earner receives taxable fringe benefits or nonqualified deferred compensation, you calculate the additional tax the same way you calculate wages for withholding the regular Medicare tax.

Likewise, if former employees receive group-term life insurance in excess of $50,000, and the resulting income exceeds $200,000, you still don’t have to collect the additional tax from employees. You follow your normal procedure—report the income as wages on your 941 form and make a current period adjustment to reflect the uncollected taxes.

Key difference: According to the IRS, you don’t report the additional tax on the employee’s W-2 in Box 6 or Box 12 with Code N; the uncollected regular Medicare tax is reported in Box 12, as usual.

PAYROLL PRACTICE TIP: You don’t have to notify employees about the additional tax, but doing so will stave off angry phone calls to Payroll next year.