Human Resource & Payroll Services And Solutions - Houston, Dallas, Austin - Texas www.hrp.net. Two new surtaxes are kicking in on January 1, 2013 for some taxpayers. These taxes have nothing to do with the expiring tax breaks involved in the "fiscal cliff." The first is a 3.8 percent Medicare tax on net investment income. The second is an additional 0.9 percent Medicare tax on wages and self-employment income. It's possible for a taxpayer to be subject to both taxes. This presentation explains how the new 0.9 percent Medicare tax works.

1. Toll Free: 877.880.4477
Phone: 281.880.6525
IRS Provides Guidance on the New 0.9
Percent Medicare Tax
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2. The IRS recently issued much-anticipated guidance on the new 0.9 percent
Medicare tax on wages and self-employment income. The new tax, which
will only affect upper-income individuals, takes effect on January 1, 2013.
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3. Basics on the New Tax
Before 2013, the Medicare tax on salary and net self-employment (SE)
income was a flat 2.9 percent.
• If you are an employee, 1.45 percent was withheld from your paychecks,
and the other 1.45 percent was paid by your employer.
• If you are self-employed, you paid the whole 2.9 percent Medicare tax
yourself as part of the self-employment (SE) tax.
Things have changed. The healthcare legislation (passed in 2010) added an
extra 0.9 percent Medicare tax on:
• Salary and/or SE income above $200,000 for unmarried individuals.
• Combined salary and/or net SE income above $250,000 for married joint-
filing couples.
• Salary and/or net SE income above $125,000 for married individuals who file
separately.
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4. 1 Impact on Employees:
1
» If you are a higher-income employee, your employer must withhold
the new 0.9 percent Medicare tax from your paychecks, starting in
2013. That will result in a maximum Medicare tax wage withholding
rate of 2.35 percent (1.45 percent plus 0.9 percent) for 2013 and
beyond.
» The maximum wage withholding rate for Social Security and
Medicare taxes combined will be 8.55 percent (6.2 percent for Social
Security plus 2.35 percent for Medicare) for 2013 and beyond.
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5. 2 Impact on Self-Employed Individuals:
2
» If you are a higher-income self-employed person, you will pay the
new 0.9 percent Medicare tax as part of your SE tax bill, starting in
2013.
» The maximum rate for the Medicare tax component of the SE tax
will be 3.8 percent (2.9 percent plus 0.9 percent) for 2013 and
beyond and the maximum SE tax rate will be 16.2 percent (12.4
percent for the Social Security tax component plus 3.8 percent for
the Medicare tax component) for 2013 and beyond.
» Note: The extra SE tax hit from the new 0.9 percent Medicare tax
will not qualify for the longstanding deduction for 50 percent of your
SE tax bill.
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6. 3 Impact on Estimated Tax Payment Obligations:
3
» If you owe the new 0.9 percent Medicare tax, you should take it into
account in determining the amount of quarterly estimated tax
payments that you will need to make to avoid the IRS interest charge
penalty on insufficient estimated tax payments.
» Note that you can potentially be affected by this issue even if all
your income is from wages earned as an employee, because your
employer might not withhold enough from your wages to cover the
new tax.
» For example, this might happen if both you and your spouse work as
employees, but only one of you or neither of you has high enough
wage income be subject to withholding for the new 0.9 percent tax
(see Example 2 below).
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7. Highlights from the New IRS Guidance
The recently issued IRS guidance on the new 0.9% Medicare tax comes in
the form of so-called proposed reliance regulations--which taxpayers can
rely on even though they are only proposed rules--and 47 questions and
answers (FAQs) that have been posted on the IRS website. Here are the
highlights.
Employer Withholding Guidance
The new 0.9 percent Medicare tax only applies to employees -- not
employers. However, employers must begin withholding the new tax once
your 2013 wage income exceeds $200,000, regardless of your tax filing
status and regardless of your income from other sources or lack thereof.
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8. Example 1: George is a married joint-filer. In 2013, he earns a salary of
$249,000. He has no other wage or SE income. His wife has no wage or SE
income. George and his wife don't owe the 0.9 percent Medicare tax because
they don't have wage or SE income in excess of the $250,000 threshold for
joint-filing couples. Even so, George's employer must withhold the 0.9 percent
tax on $49,000 (the excess of George's salary over the $200,000 withholding
threshold). The withheld amount is $441 ($49,000 times 0.9 percent). When
George and his wife file their 2013 federal income tax return, they will receive
a federal income tax withholding credit for the $441 that was withheld.
There can also be situations where there is no wage withholding for an
employee who does in fact owe the 0.9 percent tax.
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9. Example 2: Jill is a married-joint filer. In 2013, she earns a salary of $180,000. Her
husband earns $140,000. Jill and her husband have no other wage or SE income.
There is no employer withholding for the 0.9 percent tax because neither Jill or
her husband have wage income in excess of the $200,000 withholding threshold.
Nevertheless, they owe the 0.9 percent tax on $70,000 ($180,000 plus $140,000
minus the $250,000 joint-filer threshold), which amounts to $630. When Jill and
her husband file their 2013 federal income tax return, the $630 will show up as an
addition to their federal income tax liability.
Additional withholding for the 0.9 percent tax starts with the pay period during
which an employer pays an employee wages in excess of the $200,000
withholding threshold. When a payment causes the $200,000 withholding
threshold to be exceeded, the additional withholding only applies to the portion
of the payment that exceeds the threshold.
Example 3: In 2013, Kent receives $170,000 of salary payments through
November 30, 2013. On December 1, 2013, he receives an $85,000 bonus. The last
$55,000 of the bonus payment is subject to withholding for the 0.9 percent tax.
Kent's December salary payments are also subject to withholding for the 0.9
percent tax.
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10. What Kinds of Employee Compensation Are Subject to the Tax?
The proposed regulations merely say the new 0.9 percent Medicare tax
applies to "wages" in excess of the applicable threshold ($200,000,
$250,000 or $125,000, whichever applies). However, IRS Frequently Asked
Questions on the tax provide the following specifics.
1 Taxable fringe benefits - Your employer must withhold for the new 0.9
1
percent tax when your total wages--including the value of any taxable
noncash fringe benefits that are treated as wages for federal employment
tax purposes--exceeds $200,000. Examples of taxable fringe benefits
include the value of personal use of a company car and company-paid club
memberships.
2 Group-term life coverage in excess of $50,000 - The imputed value of
2
group-term life insurance coverage in excess of $50,000 is subject to the
Social Security and the "regular" Medicare tax under longstanding rules.
The imputed value is also subject to withholding for the new 0.9 percent
Medicare tax to the extent the imputed value -- when combined with other
amounts treated as wages for federal employment tax purposes -- exceeds
the $200,000 withholding threshold.
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11. 3 Third-party sick pay - Wages paid by an employer and by the third party
3
must be aggregated to determine whether the $200,000 withholding
threshold for the new 0.9 percent tax is met. The same rules that
assign responsibility for sick pay reporting and withholding for
purposes of the "regular" Medicare tax also apply for purposes of the
new 0.9 percent tax.
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12. Do You Have Both Wage and Self-Employment Income?
If you have both wage income subject to federal employment tax
withholding and net SE income subject to the SE tax, take the following
steps to determine how much, if anything, you owe for the new 0.9
percent Medicare tax
Step 1: Calculate the 0.9 percent tax on any wages in excess of the applicable
threshold ($200,000, $250,000 or $125,000, whichever applies to you).
Step 2: Reduce the applicable threshold (but not below zero) by the total
amount of your wages that are subject to the "regular" Medicare tax.
Step 3: Calculate the 0.9 percent tax on your net SE income in excess of the
reduced applicable threshold calculated in Step 2.
The following examples illustrate how this three-step drill works.
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13. Example 4: Linda is unmarried. For 2013, she has $160,000 of wages subject to the
"regular" Medicare tax. Because her wages are below the $200,000 withholding
threshold for the 0.9 percent Medicare tax, Linda's employer does not withhold
anything for the 0.9 percent tax.
Linda also has net SE income of $140,000 from a very profitable side business. To
calculate the 0.9 percent Medicare tax on her SE income, the $200,000 applicable
threshold for unmarried individuals is reduced by Linda's $160,000 of wages, resulting
in a reduced threshold of $40,000 ($200,000 minus $160,000). Therefore, Linda owes
the 0.9 percent tax on $100,000 of SE income ($140,000 minus $40,000 reduced
threshold), which will increase her 2013 federal income tax bill by $900.
Example 5: Mark and Mary are married joint-filers. In 2013, Mark has wages subject to
the "regular" Medicare tax of $190,000. Because his wages are below the $200,000
withholding threshold for the 0.9 percent Medicare tax, Mark's employer does not
withhold anything for it.
Mary has net SE income of $210,000. To calculate the 0.9 percent Medicare tax on
Mary's SE income, the $250,000 applicable threshold for joint-filing couples is reduced
by Mark's $190,000 of wages, resulting in a reduced threshold of $60,000
($250,000 minus $190,000). Therefore, Mark and Mary owe the 0.9 percent tax on
$150,000 of SE income ($210,000 minus $60,000 reduced threshold), which will
increase their 2013 federal income tax bill by $1,350.
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Toll Free : 877.880.4477
Phone : 281.880.6525
Fax : 281.866.9426
E-mail : info@hrp.net
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