The Internal Revenue Service has issued proposed regulations on the 0.9 percent Additional Medicare Tax for upper-income taxpayers scheduled to take effect next year as a result of the Affordable Care Act.
The proposed regulations in REG-130074-11 provide guidance for employers and individuals relating to the implementation of Additional Medicare Tax. The guidance also contains proposed regulations relating to the requirement to file a return reporting Additional Medicare Tax, the employer process for making adjustments of underpayments and overpayments of Additional Medicare Tax, and the employer and employee processes for filing a claim for refund for an overpayment of Additional Medicare Tax. In addition, the document provides notice of a public hearing on the proposed rules.
In addition, the IRS posted a FAQ on the Net Investment Income Tax of 3.8 percent on the net investment income of individuals, estates and trusts above a certain threshold. It too takes effect next year as a result of the Affordable Care Act.
The IRS noted that calculating wages for purposes of withholding Additional Medicare Tax would be no different than calculating wages for FICA generally. Thus, for example, if an employee has amounts deferred under a nonqualified deferred compensation plan and the nonqualified deferred compensation is taken into account as wages for FICA tax purposes under the special timing rule, the NQDC would likewise be taken into account under the special timing rule for purposes of determining an employer’s obligation to withhold Additional Medicare Tax.
Similarly, when an employee is concurrently employed by related corporations and one of the corporations disburses wages for services performed for each of the employers and the arrangement otherwise satisfies the common paymaster provisions, the liability for FICA tax with respect to the wages disbursed by the common paymaster is computed as if there was a single employer. In this case, the obligation to withhold Additional Medicare Tax on wages in excess of $200,000 disbursed by the common paymaster would also be determined as if there was a single employer.
The proposed regulations provide rules for the withholding, computation, reporting and payment of Additional Medicare Tax on wages, self-employment income and Railroad Retirement Tax Act compensation. The proposed regulations also provide rules for when and how employers may make an interest-free adjustment to correct an overpayment or an underpayment of Additional Medicare Tax and how employers and employees may claim refunds for overpayments of Additional Medicare Tax. These procedural rules for interest-free adjustments and claims for refund track the existing rules that apply to income tax withholding rather than the rules that apply to FICA tax. The regulations take this approach because Additional Medicare Tax, like income tax withholding, does not include an employer portion, and the ultimate liability is reconciled on the individual employee’s income tax return.
The proposed regulations also update the rates of tax for the Social Security and Medicare tax on employees, and add a paragraph describing the rate of Additional Medicare Tax. The proposed regulations provide an updated example illustrating that the Social Security and Medicare rates applicable to the calendar year in which wages are received apply to compute the tax liability.
The proposed regulations describe the extent to which an employer is required to withhold Additional Medicare Tax. The proposed regulations provide that an employer must withhold Additional Medicare Tax from an employee’s wages only to the extent that the employee receives wages from the employer in excess of $200,000 in a calendar year. In determining whether wages exceed $200,000, an employer does not take into account the employee’s filing status or other wages or compensation which may impact the employee’s liability for the tax. An employee may not request that the employer deduct and withhold Additional Medicare Tax on wages of $200,000 or less.
However, an employee who anticipates liability for Additional Medicare Tax may request that the employer deduct and withhold an additional amount of income tax withholding under Section 31.3402(i)-2 on Form W-4. This additional ITW can apply against taxes shown on Form 1040, including any Additional Medicare Tax liability. An employee might request that the employer deduct and withhold an additional amount of ITW on wages that are not in excess of $200,000 if, for example, the employee is married and files a joint return, and anticipates liability for Additional Medicare Tax because the combined wages of the employee and the employee’s spouse will exceed $250,000.
The proposed regulations include examples illustrating the extent of the employer’s obligation to withhold Additional Medicare Tax.
Further, the proposed regulations under section 3102(f) provide that to the extent Additional Medicare Tax is not withheld by the employer, the employee is liable for the tax. The proposed regulations also provide that the IRS will not collect from an employer the amount of Additional Medicare Tax it failed to withhold from wages paid to an employee if the employee subsequently pays the Additional Medicare Tax.
However, the proposed regulations also specify that the employer would remain subject to any applicable penalties or additions to tax for failure to withhold Additional Medicare Tax as required.
11 Comments
Amen, wingedunicorn, amen.
The majority of these posters appear to be part of a self-absorbed little group who feed off each others "knee-jerk" anti-Obama statements and identify with the out-of-touch Republican hard-liners. I'm not sure any one them have thought their beliefs through thoroughly - that is the safety of belonging to a herd.
I am an enrolled agent with over 40 years experience in taxation. I started out with a Fortune 100 company, and have been (happily) working my way down society's ladder ever since. Now I do taxes for TRULY SMALL business owners, and trust me, none of them have a million dollars to hide offshore.
My business people, and their workers, know how to work for a living. And I use the knowledge gleaned from years of experience with society's upper echelons to help the working person hang onto as much as possible.
These people can't afford to own a Congressman, but I can help them piggyback on legislation designed for the wealthy.
And no, Bill, I don't need some CPA with five whole years in business to "dazzle" anyone for me. You will probably lose some of that foolish arrogance as you gather more experience. I hope.
Each of us has a mission to act as the advocate of our client, to ethically achieve the best result for them. But not at the expense of the rest of society. Or the loss of our own souls.
Kate Harner, EA
Posted by: KATEHARNER | December 7, 2012 5:16 PM
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unlike many of those commenting here, the majority of my clients are low income wage earners: theme park employees, office workers, small business owners [gross revenues <250,000/yr], college students, teachers. the majority qualify for the EITC, the AOC, some even for food stamps. fair share? let's suppose the tax rate is a flat 15% on earned AND on unearned income. let's not consider deductions, credits or exemptions because we will eliminate ALL of these with the flat tax. so we have a couple, both nurses, with 2 college kids, total income 175G. their federal tax is now 26,250. previously, with a little magic, their federal tax liability was about 12,000. another couple, theme park workers, also 2 kids, combined income 40G. tax liability is 6,000. previously they received about 2,500 in EITC and ACTC. let's go further. 1st couple still has an after tax income of 148,750. they can afford a home, college, cars, food, even the occasional night out. 2nd couple now has a disposable income of 34,000. they pay the rent, utilities and other essentials and have nothing less. is it MY fault? no. is it YOUR fault? no. do i have the rachmunis to know that a few years ago i was in that position and believe that everyone needs a chance to get out of the hole? yes. do i know what the answer is? no. do i think most of the other posters need to take a walk on the wild side and try living like the lower third? yes.
Posted by: wingedunicorn0205@hotmail.com | December 7, 2012 10:36 AM
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Giving the government more money so it can continue to exacerbate the real problem; SPENDING, won't work. The only source of increased revenues should be from private sector growth. Anyone in our professions should have a comprehensive understanding of the "marketplace". We should not be fooled into thinking the confiscation of wealth (from others of course) by the government is beneficial to the economy. The destruction of the incentive to invest in America, to be productive, and to create wealth is well underway. The top two percent may develop into the top three percent in the near future. After all they won't notice it. What about the top four percent? I'm certain another poll would show that the bottom ninety-six percent would overwhelmingly support taxing the top four percent. It would clearly be a mandate from the people. The public is clueless (dumb) about income taxes so you can tell them that evil rich people and corporations pay less than this 80 year old widow living on Social Security and they will believe you. America became great by providing the freedom to create wealth so I don't understand why we need to fundamentally change America.
Posted by: hisexcellency | December 7, 2012 9:11 AM
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Dear Kate Harner,
Since actual names are important to you, mine is Bill Hurley. I am a licensed CPA in Illinois and owner of a 10 person practice providing tax and accounting services to small businesses, their owners and key executives, and a collection of mid-career and mature career executives where tax is an important element of their financial and wealth accumulation objectives. I am proud to create jobs for 10 people and make quality health and retirement benefits available to them on a shared cost basis where we pay a very generous portion thereof.
Frankly, you'd last about five minutes with the clients we are blest to serve and who account for a retention rate of of over 97% over a rolling period of five years. All of our clients work hard, most create jobs and all will be affected by the additional tax on top of the taxes they already pay. We wouldn't know a trust fund baby if we saw one.
Enjoy yourself. If you're in our market please stay; if not please move there so we can dazzle your clients with what we are able to accomplish for them just like we do for those who already work with us.
Bill
Posted by: wmthurley | December 6, 2012 8:25 PM
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Dear Sesines:
If you were just a little more enlightened, I might consider letting YOU work for ME.
Or maybe if you had the gumption to use your actual name......
Kate Harner, EA
Posted by: KATEHARNER | December 6, 2012 7:10 PM
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My thought on Obama considering a married couple of $250,000 being a high income earner, WOW. If this couple is a family of 4, and have 2 children in college, this is not a lot of money. I think that the limit should start at a higher number, if they have to make this choice at all. Obama needs to CUT, CUT, CUT. He should stay home this holiday season instead of spending an excessive amount of our tax dollars to travel to Hawaii. Something is wrong with this picture.
Posted by: laurellc | December 6, 2012 3:24 PM
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Wow...what a statement re "trust fund babies"..I do quite a lot of high income taxpayers...and they aren't trust fund babies. They are well educated people, who have saved and at the same time have paid taxes for years...far in excess of what might truly be considered a "fair share"...unless you are one of the people who want more than you contribute. In addition, since I am in CA I am watching the state tax these people to the point that many will not grow their businesses here (but will set up facilities elsewhere) or if retired are leaving the state. I am astounded at the ignorance of the general population under the theory that taxing high income people is fair...when the share paid is already out of kilter. Class warfare as practiced this last election is in full throttle...and comments like the ones about trust fund babies show that the envy unfortunately even extends to those who should know that a simple Google search shows that the top 10% of earners are paying 71% of the income tax burden. Perhaps Ms Hammer should review JFK's statement "It is a paradoxical truth that tax rates are too high today, and tax revenues are too low and the soundest way to raise the revenues in the long run is to cut the tax rates. ... "[A]n economy constrained by high tax rates will never produce enough revenue to balance the budget, just as it will never create enough jobs or enough profits."
Posted by: sandii1 | December 6, 2012 12:25 PM
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It is hard to fathom or accept the divisiveness of Obama and his party who continue to claim that the "wealthy" don't pay their "fair share"? What a perpetual lie! Look at the stats as to who pays the income tax. The top 10% of earners (not a great number in relationship to the entire population) pay most of all of the income taxes collected. This does not even consider the amount of other taxes (property, sales, excise,etc) paid by that group. Even if the "wealthy" were to be taxed as proposed, the amount collected would be insignificant in solving our real problem, which is, .... SPENDING and bankrupting entitlements such as "Obama Care", "Obama phones", etc., etc. etc. !!. By perpetuating the "fair share" myth, the Obama administration defers the attention from the spending excesses. The attitude "From those who have, to those who need"(Marx) is encouraging class warfare. Rather than pick on a few, our government should fix the Tax Code, cut spending, and learn to live within their means! As a final comment, the "trust fund baby" comment from Ms. Harner is typical left wing garbage. And finally, you can't fix our nations economy by becoming more like Greece, et al.!!
Posted by: mcameron@ddccpa.com | December 6, 2012 12:06 PM
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To Ms. Harner - I am not sure I have ever read a more arrogant and completely out of touch comment than yours. How irresponsible for you to make a statement that most "higher income" clients are probably "trust fund babies" who don't work anyway???
The fact that you would suggest misleading your clients with tales of uninsured and bankrupt people is so unethical. More disturbing is you see nothing wrong with the taking of other people's property and you can justify the thievery is more unsettling.
Thank God you are not working for me.
Posted by: sesines | December 6, 2012 11:23 AM
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Most of your "higher income" clients are probably trust-fund babies who don't work anyway. The 3.8% tax will be the only one with an impact on them, and they won't even notice it unless you point it out.
Just explain to them that the alternative is the continuation of the drain on the economy caused by uninsured people defaulting on their medical bills/credit cards or going into bankruptcy. This piddling donation by the trust-fund babies will go a long way in solving one of our major economic problems.
To quote Richard Nixon from his memoir: "You can't fix the economy without fixing health care."
Kate Harner, EA
Posted by: KATEHARNER | December 5, 2012 2:42 PM
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And we like to think that we can and should reform and streamline the tax code. Welcome to the brave new world of ACA/Obamacare, the homegrown monstrosity made in America. Those of us with higher-income clients will need to advise them accordingly during this upcoming tax season.
Posted by: janejohn | December 5, 2012 1:55 PM
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