Getting on Track with New Taxes
Additional 0.9% Medicare Tax Background
IRS recently issued proposed regulations regarding the 0.9%
Additional Hospital Insurance Tax on High-Income Taxpayers
(commonly referred to as the additional Medicare tax), which
takes effect January 1, 2013. The IRS also released answers to
frequently asked questions (FAQs) concerning the new tax.
Individuals, employers, and payroll service providers may rely
on the proposed regulations until final regulations are
Currently, under the Federal Insurance Contributions Act (FICA),
wages are subject to a 2.9% Medicare tax — 1.45% paid by
employers and 1.45% withheld from employees’ wages. Beginning in
2013, under the Patient Protection and Affordable Care Act of
2010, employees will be subject to the 0.9% additional Medicare
tax on FICA wages and self-employment income to the extent that
they exceed the following threshold amounts:
• $250,000 for joint filers,
• $125,000 for married taxpayers filing separately, and
• $200,000 for individuals, heads of household and other filers.
Unlike regular Medicare taxes, the additional Medicare tax
doesn’t include a corresponding employer portion. But employers
are obligated to withhold the additional tax to the extent that
an employee’s wages exceed $200,000 in a calendar year.
The proposed regulations and FAQs don’t address the new 3.8%
Medicare tax on net investment income of high-income taxpayers,
which also takes effect next year. The FAQs clarify, however,
that the net investment income tax doesn’t apply to FICA wages
or self-employment income.
Calculating the Tax
Individuals are required to report and pay additional Medicare
taxes on their income tax returns. Calculating the tax is
straightforward: Take the excess of the wages (or
self-employment income) over the applicable threshold and then
multiply that amount by 0.9%. For example, a husband and wife
who each earn $150,000 in FICA wages would be liable for
additional Medicare taxes on $50,000 (the excess of their
combined $300,000 in wages over the $250,000 threshold for joint
The proposed regulations provide guidance on calculating the tax
when an individual or married couple has both FICA wages and
The calculation of the tax is a three-step process:
1. Calculate additional Medicare tax on wages to the extent that
they exceed the applicable threshold (without regard to
2. Reduce the applicable threshold by the total amount of
Medicare wages received (but not below zero).
3. Calculate additional Medicare tax on self-employment income
to the extent it exceeds the reduced threshold.
For example, John and Heather are married and file jointly. John
earns $150,000 in FICA wages, and Heather earns $175,000 in
self-employment income. John’s wages don’t exceed the $250,000
threshold for joint filers, so the couple isn’t liable for
additional Medicare tax on his wages. To calculate the tax on
Heather’s self-employment income, subtract John’s $150,000 from
the $250,000 threshold for a reduced threshold of $100,000. The
couple is liable for additional Medicare tax on $75,000
(Heather’s $175,000 in self-employment income minus the $100,000
The proposed regulations make it clear that an employer is
required to withhold additional Medicare tax on wages in excess
of $200,000 in a calendar year without regard to the employee’s
filing status or his/her income from other sources. This
guidance means that in some cases employers will be required to
withhold the tax from wages paid to employees who aren’t liable
for the tax—because, for example, their wages, together with
those of their spouses, don’t exceed the $250,000 threshold for
According to the FAQs, in this situation an employee can’t ask
the employer to stop withholding the tax. Rather, the employee
should claim a credit for the withheld taxes on his/her income
tax return for the year.
It’s also possible that no taxes will be withheld from employees
who are liable for the tax. Suppose, for example, that a husband
and wife file jointly and each has $175,000 in FICA wages.
Neither of their employers would be required to withhold
additional Medicare taxes, yet they’d be liable for the tax to
the extent their wages exceed the $250,000 threshold. In this
case, the tax would be $900: 0.9% × ($350,000 − $250,000).
Similarly, no tax would be withheld if an individual has two
jobs and neither job pays wages in excess of the threshold.
Under the proposed regulations, employees who anticipate
additional Medicare tax liability may not request that their
employers withhold additional amounts specifically for the tax.
They may, however, use Form W-4 to request additional income tax
withholding sufficient to cover their liability for the
additional Medicare tax. To the extent this additional liability
isn’t covered by employer withholding, employees should use
estimated tax payments to make up the shortfall and avoid
interest and penalties.
If an employee’s annual wages are expected to top $200,000, the
employer isn’t required to withhold additional Medicare tax from
the beginning of the year. According to the FAQs, “An employer
is required to begin withholding additional Medicare tax in the
pay period in which it pays wages in excess of $200,000 to an
An employer that fails to meet its withholding, deposit,
reporting, and payment responsibilities is liable for additional
Medicare tax—plus all applicable penalties. If the employee pays
the tax, then the employer is relieved of liability for the tax,
but may still be subject to penalties.
Adjustments and Refund Claims
The proposed regulations allow employers to make interest-free
adjustments in the event of underpayments or overpayments of
additional Medicare tax. Generally, this adjustment is done by
filing the appropriate corrected return (for example, Form
941-X) and then either reimbursing overpaid amounts to the
employee or collecting underpaid amounts from the employee’s
wages before the end of the year.
Underpayments may be adjusted only if the error occurs during
the same year the underlying wages were paid (with certain
exceptions, including underpayments attributable to
administrative errors or IRS examinations). The employer is
liable for the correct amount of tax, even if it’s unable to
deduct underpaid taxes from the employee’s wages.
Overpayments may be adjusted if the employer ascertains the
error in the year the wages were paid and reimburses the
employee for overcollected amounts by the end of the year. If
the employer is unable to reimburse the employee by year end, it
shouldn’t make an adjustment. Instead, it should report the
amount withheld on the employee’s W-2 so the employee can obtain
credit for the tax (and, if appropriate, a refund) on his or her
individual income tax return.
The proposed regulations allow an employer to claim a refund of
overpaid additional Medicare tax, provided it didn’t deduct or
withhold the overpaid amounts from the employee’s wages.
The additional Medicare tax will take effect soon. To be ready,
employers should be sure that their payroll procedures and
systems are equipped to handle the new withholding requirements.
High-income taxpayers should evaluate their liability for the
tax and adjust their withholdings or estimated tax payments