The following is a summary of the most important tax developments that have occurred in the past three months that may affect you, your family, your investments, and your livelihood. Please call us for more information about any of these developments and what steps you should implement to take advantage of favorable developments and to minimize the impact of those that are unfavorable.
Additional Medicare tax may warrant withholding or estimated tax adjustments. Individuals with high earned income from wages or self-employment should consider whether they need to adjust their withholding allowances and/or estimated tax to take into account the additional 0.9% Medicare tax that applies for the first time this year.
Effective for tax years beginning after 2012, an additional 0.9% Medicare (hospital insurance, or HI) tax applies to individuals receiving wages with respect to employment in excess of $200,000 ($250,000 for married couples filing jointly and $125,000 for married couples filing separately). The tax is in addition to the regular Medicare rate of 1.45% on wages received by employees. The tax only applies to the employee portion of the Medicare tax. The employer Medicare tax rate remains at 1.45%, and the employer and employee Social Security tax remain at 6.2% on the first $113,700 of wages.
The Medicare tax on self-employment income for any tax year beginning after Dec. 31, 2012, also is increased by an additional 0.9% of self-employment income that exceeds the same thresholds as apply for employees (see above). But the $200,000, $250,000, and $125,000 thresholds are reduced by any wages taken into account in determining the additional 0.9% HI tax on wages.
In the case of employees, the additional 0.9% Medicare tax is collected through withholding on FICA wages (or Railroad Retirement Tax Act (RRTA) compensation) in excess of $200,000 in a calendar year. In addition, employees may request additional income tax withholding (ITW) on wages on Form W-4, and use this additional ITW to apply against taxes shown on their return, including any additional 0.9% Medicare tax liability. To the extent not withheld, the 0.9% additional Medicare tax must be included when making estimated tax payments.
Employers must withhold the additional Medicare tax from wages in excess of $200,000 regardless of filing status or other income. The additional withholding applies in the pay period in which the employer pays wages in excess of $200,000 to an employee, and the employer need not notify the employee that additional withholding has commenced.
Some taxpayers should consider having more income tax withheld if they have not had enough Medicare tax withheld. Keep in mind that the additional 0.9% Medicare tax will not be withheld by an employer unless the employee has received more than $200,000 of wages from that company. Thus, an employee who begins working for a new employer midway through the year, and who expects to exceed the $200,000 threshold only after taking into account wages from all employers during 2013, could wind up having too little withheld.
An employer must begin withholding the additional Medicare tax once an employee’s wages are over the threshold, even if the employee may not ultimately be liable for this tax. This could occur, for example, if one spouse earns $250,000, the other spouse isn’t employed, and they file a joint return. Although the employer must withhold on the employed spouse’s wages to the extent they exceed $200,000, the couple wouldn’t actually be liable for the additional Medicare tax because their wages won’t exceed the applicable $250,000 threshold. Thus, at year-end, the couple will wind up having overpaid $450 in Medicare tax (.9% of $50,000). This couple can adjust their W-4 withholding downward to account for the excess $450 withheld for Medicare tax.
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