IRS Employers’ Obligations on ACA Mandated Medicare Surtax

By usapayroll
In June 23, 2014
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What exactly are high earners?

The monetary thresholds are defined in the IRS table below. Wages and self-employment earnings on which Medicare tax is charged, and which exceed the thresholds listed, are subject to the “additional Medicare tax,” as the IRS calls it. The classes of employment and types of payments which are subject to Medicare, as well as Social Security and FUTA, are spelled out in IRS Publication 15. Here are a few examples from the IRS.

When Are Individuals Subject to Additional Medicare Tax?

Filing Status Threshold Amount
Married filing jointly $250,000
Married filing separate $125,000
Single $200,000
Head of household (with qualifying person) $200,000
Qualifying widow(er) with dependent child $200,000
Source: IRS.gov

Disabled workers’ wages: Exempt if worker did not perform any service for the employer during period for which payment is made.

Resident aliens: Taxable same as for U.S. citizens for services performed in the U.S.

Spouse employed by a spouse: Taxable in the course of a spouse’s business.

Fringe benefits: Taxable on the excess of fair market value of the benefit over the sum of an amount paid for it by the employee and any amount excludable by law. “However,” the IRS warns, “special valuation rules may apply” (including those for cafeteria plans).

Employer contributions to a qualified retirement plan: Exempt.

As the table indicates, the threshold for those filing married jointly, at $250,000, is only slightly ($50,000) higher than the $200,000 threshold for single taxpayers. However, you must withhold the additional 0.9 percent on earnings over $200,000 for any employee, regardless of filing status. For example: let’s say an employee is earning, say, $210,000, and her spouse is only earning $30,000. Their combined income falls below the $250,000 threshold and thus is not subject to the additional Medicare tax. Even so, you need to withhold the extra $90 on the $10,000 which exceeds the $200,000 threshold.

Curiously, if employees expect to exceed the threshold and request a higher withholding amount in anticipation of the excise tax, they cannot require you to do so. Rather, they can request that you withhold “an additional amount of tax withholding on Form W-4… the additional income tax withholding will be applied against your tax shown on [the employee’s] individual income tax return,” according to the IRS.

If it is clear that an insufficient amount will be withheld to cover the extra tax, you (or employees, if applicable) can simply make estimated quarterly tax payments. While they cannot be specifically designated to cover the extra Medicare liability, it will all shake out when the taxpayers file their 1040 tax forms.

Mixing Earnings, Self-Employment Income

Things get a little more complicated when one earner in a family is paid a salary, and the other is self-employed. Here’s how it works: Suppose Jack and Jill are married, filing jointly. Jack earns $150,000 from his employer, and Jill has $175,000 in self-employment income.

Since Jack’s $150,000 is below the $250,000 threshold for married couples filing jointly, he is not directly subject to the extra withholding. But to determine Jill’s additional Medicare tax status, Jack’s $150,000 in earnings is subtracted from the $250,000 threshold, reducing it to $100,000. Jill’s $175,000 in self-employment income exceeds the adjusted $100,000 joint return threshold by $75,000, and that amount is subject to the additional Medicare tax.

Additional Pointers

Here are some additional pointers on your obligations with respect to withholding the “additional Medicare tax:”

If you fail to withhold enough from employee earnings to cover the additional Medicare tax, and the employee doesn’t pay that amount himself, you are obligated to pay it.

Even if, in the end, it turns out that the employee was not liable for an amount you failed to withhold, you’re not off the hook. “The employer that [fails to] meet its withholding, deposit, reporting, and payment responsibilities for additional Medicare tax may be subject to all applicable penalties,” the IRS warns.

You are not required to notify employees if you begin to withhold additional amounts to cover the additional Medicare tax liability.

If an employee earning more than $200,000 asks you not to withhold the additional 0.9 percent because he’s married and filing a joint return and doesn’t expect the combined amount to top $250,000, must you accede to his or her wishes? No. You must still withhold the extra amount.

Suppose an employee’s total compensation exceeds $200,000, but some of that amount comes from taxable employee benefits. How do you deal with withholding the additional 0.9 percent? The same way you compute regular payroll taxes on the amount below $200,000.

As noted, seek the advice of a tax or payroll professional if you are uncertain as to whether you have met your “additional Medicare tax” withholding responsibilities.

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