Additional Medicare Tax Information for Employers
How the Additional Medicare Tax Works - for Employees and Self-employed
At the end of 2013, the Internal Revenue Service (IRS) issued the final regulations for the Additional Medicare Tax in which employers are now responsible for withholding the tax on wages and railroad retirement (RRTA) compensation. It is applied to self-employment income, as well.
The additional Medicare tax rate of 0.9% is applied to an individual's wages, compensation, or self-employment income, along with that of their spouse in the case of a joint return, if the threshold amount of the filing status is?
- 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
Employers do not have to contribute to this additional tax, but instead, they withhold it from their employees' earnings if the above income threshold is met.
Before you calculate Medicare taxes and Social Security taxes, deduct any payments to employees that are not included in Social Security wages, so you're not adding additional tax to income that shouldn't be taxed.
Withholding Additional Medicare Tax
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, including tip income, is subject to Social Security and Medicare taxes.
The Medicare tax rate is 1.45% for the employer and employee each. For the Additional Medicare Tax, the income threshold is $200,000, at which point the 0.9% above that amount is withheld from the employees' income. That means, above $200,000, individual withholding for Medicare tax is a total of 2.35% (1.45% + 0.9%).
For example, if an employee's wages are $220,000 for the year, the employee and employer each pay $2900 ($200,000 x 1.45%) for the amount up to $200,000. The employer pays $290 for the additional $20,000 ($20,000 x 1.45%) and the employee pays $470 ($20,000 x 2.35%) for both Medicare and the Additional Medicare Tax.
How to Report 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 the semi-weekly or monthly basis you've selected as your payment schedule for the year.
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.
Why You Need to Know About the Tax
Along with complying with tax laws, there are several reasons why you want to stay informed of how the Medicare tax works for single individuals and married couples.
Because Employees Ask Questions
The amount of Medicare withholding may not be the amount an individual must pay, and the employee may be confused about how the withholding works. Some employees may have additional Medicare tax due in excess of the amount withheld. This additional tax must be paid on the individual's personal income tax return.
You cannot give tax advice, but employees need to know the possible differences between amounts withheld and amounts payable by employees. The IRS says:
...an employee who anticipates liability for Additional Medicare Tax may request that his or her employer withhold an additional amount of income tax withholding on Form W-4. This additional income tax withholding will be applied against all taxes shown on the individual’s income tax return (Form 1040), including any Additional Medicare Tax liability.
Because It's on the Employee's W-2
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.
If an employee's withholding is miscalculated and they are owed a refund, the employee must request the refund directly from the IRS on Form 8959. Don't attempt to give the employee a refund on a miscalculation of federal income tax or FICA tax.
Because You May Be an Employee
If you work as an employee with another business other than your own, or if you are an employee of your corporation or S corporation, you will need to know how this Medicare tax works as you receive your own W-2 form. If you have earned more than the amounts listed above, you may have to make your own decisions about paying for additional amounts of Medicare tax or getting a refund for Medicare tax. If you owe this tax, you will need to complete IRS Form 8959 to show the calculation of amounts withheld and amounts owed, based on your tax status.
Because You May Be Self-Employed
The new Medicare tax also affects self-employed individuals who earn over a specific amount. If you are both an employee and self-employed, all sources of earned income (as opposed to investment income) are combined to reach the levels where the Additional Medicare Tax is applicable. For example, if you earn $150,000 a year at your job, but you earned another $60,000 in a business, you've exceeded the $200,000 threshold and need to pay the Additional Medicare Tax.
There is no regular withholding for self-employment tax, so if you expect that your income might be above the levels above, you will need to increase the amount of your estimated tax payments to account for the additional Medicare tax.
The $200,000 threshold is for all income an individual earns regardless of the source. As an employer, you're only responsible for employee Medicare tax for the portion of earnings made working for you.
You can find more detailed information on the specifics of the Additional Medicare Tax, from the IRS.
IRS. "Questions and Answers for the Additional Medicare Tax." Accessed Jan. 28, 2020.
Federal Register. Internal Revenue Service. "Rules Relating to Additional Medicare Tax." Accessed Feb. 2, 2020.
IRS. "Topic No. 751 Social Security and Medicare Withholding Rates." Accessed Jan. 28, 2020.
IRS. "Instructions for Form 941," Page 8. Accessed Feb. 2, 2020.