Medicare Tax

October 22, 2013

Due to several recent client inquiries, today we are going to revisit the topic regarding increased hospital insurance tax (Medicare tax).  This tax was a result of health care reform legislation.  It affects high income earners and the employers of those same individuals.

 

For tax years beginning after December 31, 2012, an additional 0.9% Medicare tax applies to wages received with respect to employment in excess of:

  • $250,000 for joint returns;

  • $125,000 for married taxpayers filing a separate return   

  • $200,000 in all other cases

 

This tax is a component of the Federal Insurance Contributions Act (FICA) payroll tax imposed on wages.

 

The additional 0.9% Medicare tax also applies to self-employment income for the tax year in excess of the above figures.

 

Beginning in 2013, the employer portion of FICA consists of two parts, and the employee portion consists of three parts.

 

For 2013, an employer pays a 7.65% FICA tax consisting of:

  • 6.20% Social Security tax on the first $113,700 of an employee’s wages (maximum tax is $7,049.40 [6.20% of $113,700])

  • 1.45% Medicare tax on the employee’s total wages with no ceiling

 

For 2013, an employee pays:

  • 6.20% Social Security tax on the first $113,700 of wages (maximum tax is $7,049.40 [6.20% of $113,700])

  • 1.45% Medicare tax on the first $200,000 of wages ($250,000 for joint returns; $125,000 for married taxpayers filing a separate return)

  • 2.35% Medicare tax (regular 1.45% Medicare tax + 0.9% additional Medicare tax) on all wages in excess of $200,000 ($250,000 for joint returns; $125,000 for married taxpayers filing a separate return)

 

Employers must begin withholding the additional 0.9% Medicare tax in the pay period in which wages are in excess of $200,000 and continue to withhold it until the end of the calendar year. 

 

The tax is only imposed on employees.  All wages that are subject to Medicare tax are also subject to additional Medicare tax withholding if paid in excess of the $200,000 withholding threshold.

 

Under IRS guidance, an employer must begin withholding at the $200,000 threshold, even if the employee might not ultimately be liable for the tax.  An example would be a married employee who files jointly makes over $200,000, but the couple’s combined income falls below the $250,000 threshold.  In this case, any excess Medicare tax withheld will be credited against the total tax liability shown on the employee’s return.

 

Disclaimer: The items included in the Tax Tip Tuesday Video Blog are informational only and are not meant as tax advice. Consult with your tax advisor to determine how any item applies to your situation. IRS Circular 230 disclosure: To ensure compliance with requirements imposed by the IRS, we inform you that any U.S. federal tax advise contained in this communication (including any attachments) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein.

 

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