The Spring issue of the Social Security Administration/Internal Revenue Service (SSA/IRS) Reporter gives pointers to employers that over-collect the 0.9% additional Medicare tax from employee wages. It explains the procedures to follow when the error is discovered before or after filing the Form 941 for the quarter during which the error was made, the requirements for interest-free adjustments of overpayments of the additional Medicare tax, and how to handle refunds for overpayments.
Background. An additional 0.9% Medicare tax applies to 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))
The tax, which is in addition to the regular Medicare rate of 1.45% on wages received by employees with respect to employment, 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 is 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))
Guidance on overpayment of additional Medicare tax. The Spring, 2014, edition of the SSA/IRS Reporter carries the following guidance for employers that over-collect additional Medicare tax (e.g., begin withholding the tax before the employee is paid wages exceeding $200,000 in a calendar year):
- If the employer discovers the error before filing Form 941 (Employer’s Quarterly Federal Tax Return) for the quarter during which the error was made, it does not have to report the over-withheld amount if it repays or reimburses that amount by the due date of the Form 941 and keeps in its records a receipt from the employee showing the date and amount of payment or a record of reimbursement.
- If the employer discovers the error after filing Form 941 for the quarter during which the error was made, but before the end of the calendar year, it also can either repay or reimburse the employee for the over-withheld amount. But the employer must repay the over-withheld amount before the end of the calendar year during which the error was made and must obtain and keep the employee’s written receipt as to the date and amount repaid. Employers can reimburse employees for over-withheld amounts by reducing future withheld taxes, but this corrective method may be used only during the same calendar year that the error occurred. Additionally, the employer must keep evidence of the reimbursement as part of its records. Any over-collections that exceed the amount reimbursed must be repaid to the employee.
- An interest-free adjustment for overpayments of additional Medicare tax can be made only if the employer discovers the error and repays or reimburses its employees within the same calendar year that the wages were paid.
- Once an employer repays or reimburses an employee, it may report both the employee and employer portions of additional Medicare tax as an overpayment on Form 941-X (Adjusted Employer’s Quarterly Federal Tax Return or Claim for Refund). The employer must certify on the form that it has repaid or reimbursed its employees.
- RIA observation: Although the SSA/IRS Reporter doesn’t specifically say so, this instruction would appear to apply only where the error is discovered after the Form 941 is filed but before the end of the calendar year.
- An employer can only file a claim for refund for additional Medicare tax that was overpaid to IRS but not withheld from the employee.
- An employee can credit any withheld additional Medicare tax against the total tax liability shown on his income tax return by filing Form 8959, Additional Medicare Tax, with Form 1040. If an error is discovered after Form 1040 was filed, the employee must file Form 1040X (Amended U.S. Individual Income Tax Return).