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Although 0.9% doesn’t seem like a lot, these changes are something most businesses and some workers will feel, at least slightly. Understanding how they will affect the payment of workers is important to today’s businesses.
What is Increasing?
Currently, most workers pay a 2.9 percent Medicare tax. Starting in January, employers will be required to take out the Additional Medicare Tax, as it is called by the IRS, from the wages and compensation for certain qualified individuals. It may also be required from self-employed individuals who make above a certain amount. Specifically, single individuals, widows and widowers with dependent children and heads of households making at or above $200,000 in the 2013 tax year will be subject to the increased tax. The amount increases to $250,000 for married individuals filing jointly. Employers will be responsible for taking out additional amount.
Why it is Necessary?
Prior to the expansions of Medicare required by the new healthcare legislation, the taxes brought into the Medicare program only covered about a quarter of the expenses of the program. Since the new legislation is making Medicare more available, there will be a need for more money.
How Much is It?
While a tax hike may not be welcome, this one is relatively small. Those who qualify for the Additional Medicare Tax will only pay an additional 0.9 percent above the current 2.9 percent Medicare tax rate. Adding the additional tax has been confusing for some businesses, sending them looking for payroll answers to help them understand these changes.
Important Questions for Today’s Businesses
On paper, the tax increase seems simple. For workers who make $200,000 or more, an additional 0.9 percent tax needs to be withheld from their paychecks. When the employee reaches that point, businesses simply need to add the additional withholding. However, this gets a little more complex in the real world, specifically when dealing with married couples or people who switch jobs in the middle of the year. In the case of a married couple, the difficulty lies in the fact that the threshold is slightly higher. In spite of this, the employer still must start withholding the tax when the worker reaches the $200,000 limit because the employer has no way of knowing what the couple's combined income is. Then, if the combined income does not reach $250,000, the IRS will send a refund at the end of the year.
Similarly, if the individual incomes of the married couple never reach $200,000, yet the combined income is over the $250,000 mark, the business does not have to worry about the withholding. In this case it is the individual's responsibility. Individuals can ask to add the withholding on their W4 forms if they wish, but the business is only responsible at the $200,000 individual mark.
A worker who switches jobs in the middle of the year, earning $200,000 before making the switch, could create a problem. Under current IRS guidelines, that worker is responsible for the Additional Medicare Tax, even at the new position, because of the $200,000 earnings at the first job. Yet the new employer would not necessarily know the worker had reached the threshold and thus would not know to withhold the tax. In this case, the IRS does not hold the employer responsible for withholding the money. The worker can request it, but the difference may simply come out in the tax bill when the individual files at the end of the year.
As businesses seek to implement the tax changes into their payroll processing departments, more questions are likely to surface. It is vital that businesses take the time now to get these questions answered, in order to avoid penalties and fines from inadvertent mistakes in the coming tax year.
- Payroll Taxes Cover About a Third of Medicare Costs – http://taxvox.taxpolicycenter.org/2012/06/15/payroll-taxes-cover-about-a-third-of-medicare-costs/
- The Three C's of Year End Preparation – http://www.paycor.com/resource-center/the-three-cs-of-year-end-preparation
- 2 Important Questions on the 0.9% Additional Medicare Payroll Tax – http://blog.primepay.com/payroll-business-experts-blog/bid/84422/2-Important-Questions-on-the-0-9-Additional-Medicare-Payroll-Tax