High income taxpayers must pay an additional Medicare tax. That means employers must add the additional tax into their calculations for withholding in their employee payroll processing systems. If you use PayNortheast as your payroll provider, this tax is automatically applied to the appropriate individuals.
The Affordable Care Act included a provision to increase the employee portion of Medicare taxes for high income earners, both employees and self-employed business owners, effective after December 31, 2012.
The additional tax rate is 0.9% of employee income. Employers do not have to contribute to this additional tax. The additional Medicare tax is effective for incomes over a threshold level, depending on the individual's federal income tax filing status.
The additional Medicare tax rate of 0.9% is applied to combined employment income and self-employment income above these levels:
Married filing jointly - $250,000
Married filing separately - $125,000
Single - $200,000
Head of household (with qualifying person) - $200,000
Qualifying widow(er) with dependent child - $200,000
How Does Withholding for the Additional Medicare Tax Work?
Every employer must calculate withholding for Medicare taxes as part of FICA taxes (Social Security and Medicare), for each employee for each pay period. All employee income is subject to Social Security and Medicare taxes.
The Medicare tax rate is 1.45% for the employer and employee each. The withholding threshold is $200,000. At the point where the employee's income is greater than this threshold, additional withholding must begin. Above this threshold, the employer continues to contribute 1.45% and the employee must also contribute 2.35%.
How Do I Report and Pay the Additional Medicare Tax?
As an employer, you must keep records of amounts of the additional Medicare tax you withhold from employee pay and that you owe as an employer. Pay these amounts along with all other payroll tax payments you make, on a semi-weekly or monthly basis.
The additional Medicare tax owed is included in IRS Form 941 (Employer's Quarterly Federal Tax Return). You will need to show the total amount of taxable wages and tips subject to this tax (on Line 5d). Remember, you are withholding the additional Medicare tax beginning at the $200,000 level, but the employee may owe more than this amount on his or her tax return.
When you prepare W-2 forms to send to employees in January, you should include an explanation of line 5 "Medicare wages and tips." Employees who had the additional Medicare tax withheld may have questions about this form and the difference between Medicare wages on this line and the amount withheld for Medicare tax withheld on Line 6.
For example, if you as an employer withheld the additional Medicare tax above $200,000, and the employee is married, filing jointly, the employee doesn't have to pay the additional Medicare tax until his/her income exceeds $250,000. In this case, the amounts in Line 5 and Line 6 will be different, and the employee may be entitled to a refund of some or all of the amount withheld.
As indicated above, PayNortheast automatically calculates and pays the appropriate taxes on their clients behalf.