The IRS issued final regulations governing the 0.9% Medicare surtax, which took effect this year (T.D. 9645). The regulations contain guidance for employers and individuals on the implementation of the tax, including the requirement to file a return reporting the tax, the process for employers to make adjustments of underpayments and overpayments of the tax, and the processes for employers and employees to file claims for refund for an overpayment of the tax. The final rules adopt the proposed regulations issued last year (REG-130074-11) with only one substantive change.
The additional Medicare tax was enacted as part of 2010’s health care reform legislation. It imposes an additional 0.9% tax on FICA wages, Railroad Retirement Tax Act compensation, or self-employment income exceeding certain threshold amounts: $250,000 for married taxpayers filing jointly; $125,000 for married taxpayers filing separately; and $200,000 for other taxpayers. The additional Medicare tax is not imposed until wages exceed those thresholds, and the employer does not owe the tax. The tax is effective for wages received in any tax year starting after Dec. 31, 2012.
The regulations require an employer to withhold additional Medicare tax from an employee’s wages only to the extent that the wages the employee receives from the employer exceed $200,000 in a calendar year. In determining whether wages exceed $200,000, the employer does not take into account the employee’s filing status or other wages or compensation that may affect the employee’s liability for the tax, including a spouse’s wages.
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 that he or she will be liable for additional Medicare tax—e.g., if household wages will exceed the married-filing-jointly threshold—may request on Form W-4, Employee’s Withholding Allowance Certificate, that the employer deduct and withhold an additional amount of income tax.)
Employers’ liability for underwithholding
If the employer deducts less than the correct amount of tax, it is liable for the correct amount unless and until the employee pays the tax. In the only change from the proposed regulations, the final rules provide that the employer will not be relieved of this liability until it has shown that the employee has paid the tax. The preamble explains that employers will use Form 4669, Statement of Payments Received, and Form 4670, Request for Relief From Payment of Income Tax Withholding, to request relief from paying tax the employee has already paid.
Reporting and payment obligation
An employee is liable for additional Medicare tax on wages or compensation to the extent that the employer does not withhold the tax. Individuals must report the tax on Form 1040, U.S. Individual Income Tax Return, and will claim on the Form 1040 credit for any tax withheld or pay any tax due that was not previously withheld or paid as an estimated tax.
The regulations illustrate how the threshold amounts for self-employed individuals are reduced (but not below zero) by the amount of any FICA wages taken into account in determining the individual’s additional Medicare tax liability. However, Railroad Retirement Act compensation does not similarly reduce the thresholds.
Adjustments for underpayments of the additional Medicare tax can be made only if the error is ascertained in the same year the wages or compensation was paid, unless the underpayment is attributable to an administrative error.
An adjustment of overpaid additional Medicare tax can be made only if the employer ascertains the error in the year the wages or compensation was paid and repays or reimburses the employee the amount of the overcollection before the end of the calendar year.
Claims for refund
Employers can claim refunds of overpaid additional Medicare tax only if the employer did not deduct or withhold the overpaid additional Medicare tax from the employee’s wages or compensation.
Employees claim a refund or credit of overpaid additional Medicare tax by taking the overpayment into account in claiming a credit against, or refund of, tax on an individual tax return for the year in which the overpayment was made, or for a tax year for which a tax return has been filed, by filing Form 1040X, Amended U.S. Individual Income Tax Return. Employees may claim a refund of additional Medicare tax only if they have not received repayment or reimbursement from their employer in the context of an interest-free adjustment.
The regulations are effective for quarters beginning on or after Nov. 29, 2013, the date the regulations will be published in the Federal Register. Some of the proposed regulations issued last year, however, are regulations that taxpayers can apply to quarters before that date. This rule is necessary because the withholding rules have been in effect for all of 2013.