Q: Your column a few weeks ago mentioned the new 0.9 percent Medicare tax that will begin next year. Our company has a number of employees who have salaries near or more than the $200,000 threshold and some that are married to working spouses. We assume their combined incomes will be more than $250,000. Do we need to ask our employees about their combined household income to know when to withhold the tax? And how does this affect the Idaho tax withholding?
A: On Jan. 1, 2013, the Additional Medicare Tax on High-Income Workers (the HI Tax) enacted under the 2010 health care law will kick in and increase the Medicare tax from 1.45 percent to 2.35 percent (a 0.9 percent increase) on high-income workers (single filers earning more than $200,000 and joint filers earning more than $250,000). However, this is only an increase on the employee’s Medicare tax; the employer will not see a change in the amount of Medicare tax paid (the employer share remains at 1.45 percent).
Employers need to be ready for this change and begin withholding the higher tax when any employee’s wage exceeds $200,000. The employer should not begin withholding the tax earlier even if it is anticipated that the employee will be subject to the tax later in the year.
Although it is good policy to make sure the employee is aware of the new tax, the law does not require an employer to notify an employee when it begins withholding the additional Medicare tax. And the joint status of any employee is moot from a withholding standpoint; withholding only occurs based on the specific worker exceeding the $200,000 amount in his or her earnings.
This new tax may result in a few interesting situations. For example, let’s say one spouse earns $210,000 and the other spouse has wages of $25,000. If they file a joint return, the total wages would be less than the $250,000 threshold, and the couple would not be subject to the new HI Tax. Even though the couple would not be subject to the tax, the first spouse’s employer would be required to withhold on the wages greater than $200,000. The couple would then be eligible get credit for this overpayment when they file their individual tax return.
In another situation, assume Bob and Betty, a married couple filing a joint return, earn $125,000 and $175,000, respectively. The combined earnings of $300,000 are greater than the HI Tax threshold, and the couple will be subject to the additional tax (0.9 percent on the $50,000 in excess of the $250,000 joint threshold, or $450). But because neither Bob nor Betty earned more than $200,000 individually, their employers will not withhold the tax. As a result, they will be required to pay this additional tax when their individual tax return is filed.
While this new law can result in some consternation for high-income taxpayers, the primary concern for employers is to simply begin withholding the additional tax when earnings hit the $200,000 mark. But, the good news is that this is a federal tax only, and will not affect your Idaho withholdings.
To ensure compliance imposed by IRS Circular 230, any U.S. federal tax advice contained in this article is not intended or written to be used, and cannot be used by any taxpayer, for the purpose of avoiding penalties that may be imposed by governmental tax authorities. The answers in this column are meant to offer general information. You should consult your tax adviser regarding the specifics of your situation.
Peter Robbins is a partner in the Boise office of CliftonLarsonAllen, LLP specializing in tax matters for small businesses, individuals, and trusts and estates.
Have a question for Robbins? Email your question to firstname.lastname@example.org. Enter “Talking Tax” in the subject line.