New for 2013: Additional Medicare Tax

Medical Records & Stethoscope

The Additional Medicare Tax went into effect this year and will be levied on wages, other compensation, and self-employment income paid after Dec. 31, 2012. The tax applies to wages, other compensation and self-employment income above certain thresholds.

Other compensation is defined as Railroad Retirement Tax Act (RRTA) compensation and the value of noncash fringe benefits that are given to an employee. Tips are a form of compensation that is also subject to the Additional Medicare Tax.

The tax targets the wealthy, and it is not levied against all income, just wages, other compensation and self-employment income. Distributions from S Corporations and capital gain income are not included in the calculations.

As we saw with Mitt Romney’s and Warren Buffet’s income tax returns, most of the wealthy individuals in this country derive their income from sources other than wages or self-employment income. Usually their wealth is derived from passive income such as dividends, interest and capital gains: These types of income are not subject to the Additional Medicare Tax. It would appear therefore, that this additional tax, while creating another nightmare of paperwork and regulation, will not be a big revenue generator.

The tax rate is 0.9% and will be applied to wages and compensation above a certain thresholds. Here’s how it breaks down:

Married filing jointly: threshold amount is $250,000

Married filing separately: threshold amount is $125,000

Single, head of household, and qualifying widow(er) with dependent child: threshold amount is $200,000

This tax applies to nonresident aliens and U.S. citizens living abroad.

Employers must calculate and withhold Additional Medicare Tax from wages and RRTA it pays to an individual in excess of $200,000 in a calendar year without regard to that employee’s filing status or without regard to wages paid by another employer. If the employer fails to withhold the tax, he/she will be liable for it unless the employee pays it. There may also be penalties assessed for failure to withhold and pay the Additional Medicare Tax. 

In some cases, not enough will be withheld, so the employee may have to adjust the withholding by completing a new Form W4 or make estimated tax payments. If workers make estimated tax payments to cover this additional liability, they don’t have to worry about specifying that it’s for the Additional Medicare Tax, the IRS will apply the proceeds accordingly.

When you prepare your income tax return for 2013, you will be required to calculate the Additional Medicare Tax and report it on Form 8959 which is still being drafted by the IRS. I’m sure this form and the calculations will be a feature of all income tax software for 2013.

The new law imposed by section 1411 on an individual’s net investment income is not applicable to FICA wages, RRTA compensation of self-employment income. Therefore an individual will not owe net investment income tax on these categories of income, regardless of the taxpayer’s filing status.