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.