Tag Archives: medicare taxes 2013

Additional Medicare Tax Creating Withholding Problems

Effective at the beginning of 2013, employees and self-employed individuals are required to pay an additional 0.9% Medicare tax on wages in excess of $250,000 for married filling joint filers, $125,000 for married individuals filling separately, and $200,000 for all other filers. Employers, while not subject to this additional Medicare tax, are required to withhold this additional 0.9% Medicare tax on wages paid to an employee in excess of $200,000, beginning in the pay period in which wages exceed this amount. This requirement can potentially create withholding problems for many taxpayers.

medicare-taxesThese potential issues arise from the fact that employees are subject to the tax based on thresholds that are dependent on a person’s filing status. However, employers are required to withhold this additional 0.9% Medicare tax on wages paid to an employee in excess of $200,000, regardless of filing status, any additional wages this employee or his spouse earns, or any self-employment income this employee may have received. This requirement may result in individuals paying more or less than they actually owe.

For example, say a taxpayer earns $230,000, his spouse earns $120,000 and they file a joint return. The taxpayer’s employer will withhold the additional Medicare tax on the $30,000 in excess of the $200,000 threshold and the spouse’s employer will not withhold any additional Medicare tax because her earnings did not exceed the threshold. However, the couple actually owes the additional 0.9% Medicare tax on $100,000, the difference between their combined wages of $350,000 and the $250,000 married filling joint threshold, so their withholdings do not sufficiently cover the tax owed.
In another example, say a taxpayer earns $230,000, his spouse has no earnings, and they file jointly. The taxpayer’s employer withholds the additional 0.9% Medicare tax on the $30,000 in excess of $200,000, as required. However, the couple actually owes no additional Medicare tax because their combined earnings do not exceed the $250,000 married filling joint threshold. In this case, employees cannot request their employer to stop or reduce the withholding, because any employer that does not meet the requirements, regardless of taxpayer liability, is subject to penalties. Employees will instead have to claim a refund when they file their 2013 tax return.

To ensure compliance with this additional 0.9% Medicare tax there are some actions employers, employees, and self-employed individuals can take. Employers should be checking their payroll systems to make sure they have started withholding the additional tax where necessary, employees should be looking to see if additional withholding may be necessary, based on their individual situations, and self-employed individuals should be making sure they are paying the proper amount of estimated tax payments. All of these actions should be considered with the help of your William Vaughan Company tax adviser.

By: Ruben Becerra, Staff Accountant

New Medicare-Related Taxes in 2013: Are you Subject to the Surtax?

Beginning in 2013, higher-income taxpayers will be subject to an additional tax on earned income and a new 3.8% tax on investment income. Both of these tax changes came as a result of the added provisions in the 2010 health reform legislation. Year 2013 is upon us and taxpayers should begin planning now in order to minimize the impact of these changes ahead.

HIGHER MEDICARE PAYROLL TAX ON WAGES

Effective for tax years beginning after December 31, 2012, an additional 0.9% hospital insurance (HI) tax is imposed on wages in excess of $250,000 for married taxpayers filing a joint return, $125,000 for married taxpayers filing separately, and $200,000 in all other cases (single or head of household).

This additional tax, subject to employees only, will effectively raise the rate on wages over the relevant thresholds mentioned above from 1.45% to 2.35%. Although the tax will not apply to the employer portion, employers do have a withholding obligation and are liable for the tax if they fail to withhold the required tax from employees.

There is a potential under-withholding problem faced by married taxpayers. Because employers are required to withhold the tax ONLY on wages in excess of $200,000 of the employee, and are NOT responsible for taking wages received by a spouse into consideration, the 0.9% HI tax will NOT be withheld and the additional amount will be reported when the couple files their tax return.

There is also a possibility for some married taxpayers to receive a tax credit for amounts overpaid when combined wages do not exceed $250,000. For example, taxpayer and spouse file a joint return. Taxpayer earns wages of $240,000 for 2013 and spouse has no earned income (wages). The employer would be required to withhold 2.35% (1.45% plus the additional 0.9%) on the excess of the taxpayer’s wages over $200,000. However, when filing their joint return, combined wages do not exceed $250,000 and the amount taxed at the additional 0.9% would be refunded.

Keep in mind the new 0.9% HI tax is a tax for purposes of the underpayment of estimated tax penalty and the couple may have to increase their withholding or make additional estimated tax payments to avoid a penalty for underpayment of estimated tax.

MEDICARE PAYROLL TAX EXTENDED TO INVESTMENTS

Also beginning in 2013, a new 3.8% Medicare contribution tax will be imposed on high-income individuals whose unearned income exceeds the same relevant thresholds mentioned above. This tax, the unearned income Medicare contribution tax (UIMCT), is equal to 3.8% of the lesser of: (1) Your net investment income (generally, net income from interest, dividends, annuities, royalties and rents, capital gains and income from a business that is considered a passive activity) or (2) your modified adjusted gross income.

Now is the time to begin planning for these new taxes in order to mitigate their impact in 2013. Opportunities to minimize this liability exist and include allocating assets that generate high income into an IRA, use of annuities to shield income, tax free investments, and the use of growth investments in lieu of income-generating holdings.

By: Katie Mokry, CPA