You’ve been withholding and reporting the 0.9% additional Medicare tax for a year now. Good news: With the exception of clarifying the procedure you use to request relief from paying any additional tax if employees paid the tax with their 1040 forms, final regulations make no changes to the proposed regs. The regs apply to calendar quarters beginning on or after Nov. 29, 2013. (78 F.R. 71468, 11-29-13)
Additional Medicare tax review. The additional tax kicks in when employees, regardless of their marital status, earn more than $200,000. Married couples filing jointly are liable for the tax if their combined wages exceed $250,000. So, if a married couple works for the same employer and each earns $150,000, you don’t withhold the additional tax, since neither employee’s wages exceed $200,000, even though you know that their combined income exceeds $250,000.
The additional tax is treated like income taxes. Joint filers and employees who work for more than one employer during the year who anticipate being underwithheld may refile their W-4s to request additional income tax withholding or pay quarterly estimated income taxes. In any event, employees remain liable for tax underpayments, which are paid with that year’s 1040 form.
Interest-free adjustments. Interest-free adjustments to overwithholding or underwithholding of the additional tax are made under the rules that apply to income tax withholding adjustments. Key: You must refund overpayments to employees by the end of the current calendar year. If you don’t refund overpayments by the end of the year, don’t file Form 941-X to adjust the error. Instead, report the total Medicare tax withheld on employees’ W-2s in Box 6; they will claim a credit for the overwithheld tax on their 1040s.
PAYBACK’S A YOU-KNOW-WHAT: You can’t make an interest-free adjustment if an employee pays back wages received in a prior year. The employee, however, may be able to file an amended 1040 form to claim the refund.
Likewise, unless underpayments result from an administrative error, worker reclassification or an audit adjustment, you must file Form 941-X and make up any underwithholding by the end of the year. The regs allow you to make up this withholding from payments that would otherwise be excluded from FICA taxes. However, you must still report and pay the correct amount of tax, even if you didn’t withhold the correct amount of tax. If you pay the tax without withholding it, it’s up to you and the employee to work out a settlement. Heads up: Since there’s no employer match, the regs allow you to claim a refund only if you didn’t withhold the tax.
You remain liable for the amounts that should have been withheld. You won’t be liable for the underwithholding, however, if you prove that employees paid the additional tax with their 1040s (you remain liable for penalties). The final regs clarify that you must obtain Form 4669 from employees and file Form 4670 with the IRS to request underwithholding relief.
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