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Follow new guidance on surtax collections

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in Small Business Tax,Small Business Tax Deduction Strategies

The 3.8% Medicare surtax on net investment income has grabbed headlines, but there’s another new Medicare surtax to worry about.

Alert: Employees may have to pay a 0.9% surtax on wages above a set amount. As an employer, you’re responsible for collecting the tax and forking it over to the IRS.

Now the Social Security Administration (SSA), in conjunction with the IRS, has provided guidance to employers that overcollect the tax.

Here’s the whole story: The 0.9% surtax applies to employees with wages above $200,000 for single filers and $250,000 for joint filers. It comes on top of all the other payroll taxes.

Employers must begin withholding the 0.9% surtax once an employee’s wages exceed $200,000, even if he or she ultimately won’t be liable for it (e.g., a joint filer with combined wages under $250,000). Any excess additional withholding is credited against the employee’s total tax liability when he or she files Form 1040.

The SSA offers the following advice to employers in situations where the 0.9% surtax is overwithheld:

  • If you discover the error before filing Form 941, Employer’s Quarterly Federal Tax Return, you don’t have to report the overwithheld amount if you repay or reimburse the employee by the quarterly due date.
  • If you discover the error after filing Form 941, but before the end of the year, you can either repay or reimburse the employee for the overwithheld amount.
  • An interest-free adjustment for overpayments of the surtax can be made only if you discover the error and repay or reimburse the employee within the same year. If you repay or reimburse an employee, you may report it as an overpayment on Form 941-X, Adjusted Employer’s Quarterly Federal Tax Return or Claim for Refund.
  • You may file a claim for refund for a surtax that was overpaid to IRS but not withheld from the employee.

Tip: If an employee discovers an overpayment after filing Form 1040, he or she must file an amended return.

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