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New FAQs clarify how to report the additional Medicare tax on the income tax return

January 14, 2014

IRS has updated and supplemented its questions and answers (referred to as FAQs) on the 0.9% Medicare tax that applies for tax years beginning after 2012. The FAQs address when taxpayers should file Form 8959 (Additional Medicare Tax) along with their returns, and detail how to handle the new tax in a variety of specialized situations, including refunds of wages paid in previous years and married filing separate filers in community property states.

Background. After 2012, there’s an additional 0.9% Medicare tax on taxpayers (other than corporations, estates, or trusts) receiving wages with respect to employment in excess of $200,000 ($250,000 for married couples filing jointly and $125,000 for married couples filing separately). (Code Sec. 3101(b)(2)) These amounts aren’t indexed for inflation.

The tax is in addition to the regular Medicare rate of 1.45% on wages received by employees with respect to employment. The tax only applies to the employee portion of the Medicare tax. The employer Medicare tax rate remains at 1.45%, and the employer and employee Social Security tax remain at 6.2%.

Employers must begin withholding the additional Medicare tax once an employee’s wages exceed $200,000, even if the employee ultimately may not be liable for the additional tax (e.g., employee earns $210,000, his spouse earns $25,000, and they file a joint return). (Code Sec. 3102(f)(1)) Any excess additional Medicare tax withheld will be credited against the total tax liability shown on the employee’s income tax return.

Conversely, the 0.9% additional Medicare tax may be owed on the employee’s income tax return where withholding is not collected for it (e.g., employee earns $175,000 and her spouse earns $150,000, or employee earns more than $200,000 and employer simply fails to withhold). (Code Sec. 3102(f)(2))

The 0.9% additional Medicare tax also applies to self-employment income in excess of $200,000 ($250,000 of combined self-employment income on a joint return, $125,000 for married taxpayers filing a separate return), but the thresholds are reduced (but not below zero) by the amount of wages taken into account in determining the additional 0.9% tax on wages. (Code Sec. 1401(b)(2)(B)))

Under Code Sec. 6654(m), the 0.9% additional Medicare tax is treated as a tax subject to estimated tax payment requirements. In the case of employees, the additional 0.9% Medicare tax is collected through withholding on FICA wages (or Railroad Retirement Tax Act (RRTA) compensation) in excess of $200,000 in a calendar year. In addition, employees may request additional income tax withholding (ITW) on wages on Form W-4 and use this additional ITW to apply against taxes shown on their return, including any additional 0.9% Medicare tax liability. To the extent not withheld, the 0.9% additional Medicare tax must be included when making estimated tax payments.

New guidance on additional Medicare tax. Several new FAQs address when taxpayers must file Form 8959 (Additional Medicare Tax) along with their returns. They make it clear that this form must be filed:

 

…If the taxpayer is liable for the additional Medicare tax. If Medicare wages and tips on all Forms W-2, Wage & Tax Statement, plus self-employment income, combined with a spouse’s Medicare wages and tips and self-employment income if a joint return is filed, are more than the threshold amount for the taxpayer’s filing status, he must file Form 8959. Where the threshold amount was exceeded, the form must be filed even if the employer already withheld the 0.9% tax, because it’s possible that the taxpayer will owe more or less tax than the employer actually withheld. (FAQs 25 and 26)
…If the employer withheld the 0.9% tax from wages or compensation, even if the taxpayer’s wages and compensation (or RRTA compensation) did not exceed the relevant threshold. In this situation, the amount that was withheld from the taxpayer’s wages or compensation may be refundable. The taxpayer must file Form 8959 to document the withholding and to receive a refund of any tax that was withheld in excess of the total tax owed on the income tax return. (FAQ 27)

 

The FAQs also discuss how a taxpayer should handle the following relatively unusual situations:

 

  • The taxpayer performed non-independent-contractor services for an employer, but the employer didn’t withhold payroll tax. In this situation, the taxpayer is advised to file (a) Form 8919, Uncollected Social Security and Medicare Tax on Wages, to report wages and compute any Social Security and Medicare taxes due, and (b) Form 8959, Additional Medicare Tax, to compute any additional Medicare tax due. These forms should be attached to Form 1040. (FAQ 28)
  • The taxpayer received tip income that he did not report to his employer. The taxpayer must file (1) Form 4137, Social Security and Medicare Tax on Unreported Tip Income, to report unreported tips and compute any Social Security and Medicare taxes due, and (2) Form 8959, Additional Medicare Tax, to compute any additional Medicare tax due. These forms should be attached to Form 1040. (FAQ 29)
  • Wage repayments, i.e., where the taxpayer refunds to an employer wage payments received in a prior year. Where the repaid wages were received in a year for which the taxpayer has filed Form 1040, he should make a claim for refund for any additional Medicare tax paid on those refund wages by using Form 1040X, Amended U.S. Individual Income Tax. (FAQ 30)

 

Separate filers in a community property state. Married filing separate spouses in a community property state calculate their additional Medicare tax using the married filing separate threshold amount of $125,000, without regard to the income tax treatment of the community property income. Each spouse calculates the tax based on his or her own wages. And only the spouse carrying on the trade or business generating any self-employment income calculates the 0.9% tax on the self-employment income because Code Sec. 1402(a)(5)(A) of the self-employment tax rules overrides community income treatment. (FAQ 22)

Illustration: A and B live in a community property state and are married filing separate. A has $200,000 in wages and B has $100,000 in self-employment income. A is liable for Additional Medicare Tax on $75,000 (i.e., $200,000 − the $125,000 threshold for married filing separate). B’s self-employment income of $100,000 does not exceed the $125,000 threshold, so B does not owe additional Medicare tax.

Possible complications. The credit for any additional Medicare tax withheld on wages applies only to the wage earner. However, FAQ 23 points out that in community property states, half of any income tax withholding on one spouse’s wages will be credited to the other spouse. By contrast, each spouse can take full credit for the estimated tax payments that he or she made. But if married filing separate spouses made joint estimated tax payments, either spouse can claim all of the estimated tax paid, or they may agree to divide it between them. If they can’t agree on how to divide it, each spouse claims credit for the portion of the estimated tax payments that equals the total estimated tax paid times the tax shown on the spouse’s separate return, divided by the combined total of the tax shown on both spouses’ returns.

FAQ 23 cautions that an individual living in a community property state who is a married filing separate spouse, and who anticipates additional Medicare tax liability, should take note of these rules.

Illustration: C and D are married filing separate spouses living in a community property state. C has $150,000 in self-employment income, and D has $240,000 in wages. C owes the 0.9% additional Medicare tax on $25,000 of self-employment income (i.e., $150,000 − the $125,000 threshold for married filing separate). D is liable for the additional Medicare tax on $115,000 of wages (i.e., $240,000 − the $125,000 threshold for married filing separate). D’s employer will only withhold the additional Medicare tax on the amount of D’s wages that exceed $200,000 (in this case $40,000). D must pay the remaining additional Medicare tax liability on $75,000 through increased income tax withholding, estimated tax payments, or payment with D’s income tax return. If D asked for additional federal income tax withholding, half of this additional withholding must be credited to C. But if D makes estimated tax payments, these payments will be credited entirely to D. If C and D make joint estimated tax payments, these payments may be divided between them as agreed or in proportion to their tax liability.