Under the IRS’ recently issued proposed regulations, beginning this year, many employees will pay an additional 0.9% in Medicare taxes, for a total tax rate of 2.35%. The new rate applies to unmarried employees earning more than $200,000, joint filers earning more than $250,000 and married couples filing separately who earn more than $125,000.
Reminder: Employers don’t match this additional tax.
Good news: The proposed regulations closely track FAQs the IRS issued last summer, so you don’t need to make many changes to your software to withhold this additional tax. And, since there’s no employer match, the regs follow the income tax withholding rules for adjusting over- or underwithholding of this tax. The regs also clarify the interplay between FICA and SECA. You may rely on these proposed regs until final regs are issued. (77 F.R. 72268, 12-5-12)
FICA is a head tax, so all employees are treated as single for withholding purposes. This rule extends to the additional Medicare tax. However, since the monetary thresholds differ, depending on filing status, some married filers may be under- or overwithheld.
Impact: The regs confirm last year’s FAQs by noting that married filers who anticipate being underwithheld may refile their W-4s to request additional income tax withholding or pay quarterly estimated income taxes. In any event, married couples remain liable for any tax underpayments. Flip side: Married filers who are overwithheld will claim a credit on their 1040s.
The FAQs also noted 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 taxableor nonqualified deferred compensation, you calculate the additional tax the same way you calculate withholding for the regular Medicare tax. The regs take the same approach.
You make interest-free adjustments to overwithholding or underwithholding of the additional Medicare tax under the rules that apply to adjusting income tax withholding. Key: You must refund overpayments to employees by the end of the calendar year during which the wages were earned.
Likewise, unless underpayments result from an administrative error, worker reclassification or an audit adjustment, you must withhold the difference between the underpayment and the proper amount of tax by the end of the year.
Heads up: The regs allow you to claim a refund of overpaid additional Medicare taxes only if you didn’t withhold those taxes.
FICA and SECA
Self-employeds pay taxes on their net earnings from self-employment under the Self-Employment Contributions Act (SECA). The SECA rate is double the FICA rate. SECA and FICA are coordinated for purposes of the additional Medicare tax, so that the $200,000/$250,000 threshold amounts under SECA are reduced by the amount of wages taken into account in determining the additional Medicare tax under FICA.
Example: Emily and Jack file jointly. Emily is self-employed and earns $140,000. Jack earns $130,000 in wages, so he’s not subject to the additional Medicare tax. But they owe the additional tax, because their combined income is $270,000.
Jack’s $130,000 in wages reduces Emily’s self-employment income threshold to $120,000 ($250,000 – $130,000 = $120,000). They pay additional Medicare tax on $20,000 of her self-employment income ($140,000 – $120,000 = $20,000).
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