Starting last year (2013), the Affordable Care Act imposed a new responsibility on employers and a new tax on successful employees and self-employed individuals.
Employers have a responsibility to withhold the additional tax when wages of an employee exceed $200,000 for the year. Workers must pay the additional tax when their earnings from a job or self-employment exceed a threshold amount for their filing status:
- $250,000 for joint filers
- $200,000 for single taxpayers
- $125,000 for married persons filing jointly
Employers have been dealing with this responsibility for a year now, while some workers may see the impact of the tax for the first time when they file their 2013 income tax return (and complete a new Form 8959). Previously the IRS posted questions and answers to help everyone, including payroll companies, with the tax.
Now the IRS has provided additional guidance on this responsibility. Here are some key points to help your company and you:
- “Wages” for purposes of the additional Medicare tax include taxable non-cash fringe benefits. Thus, employers should factor in such taxable non-cash fringe benefits as group-term life insurance over $50,000. Find a full list of taxable non-cash fringe benefits in IRS Publication 15-B.
- An employer cannot stop withholding of this additional Medicare tax at an employee’s request, even if the employee will not be subject to the tax (e.g., the employee is married and the couple’s combined earned does not exceed $250,000—the threshold for joint filers, even though the employee’s compensation is over $200,000).
- When depositing payroll taxes using EFTPS.gov, there is no need to separate the regular Medicare tax from the additional tax.
- If an employer has married couples working at the company, they should not withhold the additional tax until the compensation of a spouse exceeds $200,000, even if it’s known that their combined compensation is more than $250,000 (the threshold for joint filers to owe the additional Medicare tax).
- Employers that use employee leasing companies have the same responsibilities for withholding, which means that withholding for the 0.9% additional Medicare tax is required when an employee’s taxable compensation exceeds $200,000, even though the tax payments are forwarded to the leasing company to make the tax deposits.
If you use an outside service to handle payroll for your company, likely the service will make appropriate withholdings and remittances to cover your employer responsibility. If you handle payroll in-house, review the IRS’s questions and answers on the 0.9% additional Medicare tax to make sure you’re doing things right.
If you are self-employed and anticipate net earnings in 2014 to exceed your applicable threshold for the 0.9% Medicare tax, make sure to factor this in when figuring estimated taxes for 2014.