An employer failing to withhold the new 0.9% Medicare tax on employees at certain income thresholds may well find that ignorance – or avoidance - of the tax is no excuse for not having done what the law requires. Here are the basics:
- The withholding requirement became effective at the start of 2013.
- If a person is self-employed he or she must increase their self employment tax by 0.9%. Otherwise, employers must withhold the new tax once an employee’s wages exceed the threshold.
- The new tax applies to married couples filing jointly whose incomes exceed $250,000, and $200,000 for everyone else.
- This 0.9% tax applies only to employees and the self-employed, not employers.
- It is in addition to - not a replacement for - regular Medicare tax withholding of 1.45%.
The withholding of the additional 0.9% doesn't begin until an employee’s wages hit $200,000. If you’re an employee who falls into this category it’s a good idea to check to see if your employer added the extra withholding. Keeping quiet about it will not make it go away and having to catch up after the fact can create multiple problems. The additional 0.9% Medicare tax will be assessed when the employee files their tax return. Adjustments may need to be made to the withholding or the estimated tax payments in the subsequent year.
There are multiple scenarios to consider in terms of individual income, joint income, etc.
For example, if a married employee makes $240,000, and his wife doesn't work outside the home, the employer is still required to withhold the tax on the $40,000 the employee made above $200,000 threshold even though the employee owes no additional Medicare tax.
A refund request is necessary to get back the money. Employers can be liable for the amount of the 0.9% Medicare tax they fail to withhold, a reality that should concentrate everyone’s attention. Then there are potential penalties, interest payments, and the like.
Making sure your accounting function is accounting for the additional Medicare withholding shouldn't take long – and might save you from a lengthy and costly headache. For information on all the nuances of the law might affect you, visit the IRS website. They've posted a very thorough and lengthy Q&A that you may find helpful.
If you would like specific answers on how this requirement affects you or your business, please reach out to a tax professional for help. They can help you wade through the details and nuances of the requirement, and how it applies to your specific situation. You can find a Rodefer Moss tax professional in your area by clicking here. We're here to help!