With all of the uncertainty surrounding the “Fiscal Cliff”, there is one item that many business owners will certainly face with the new year–the Additional Medicare Tax. Implemented as part of the Patient Protection and Affordable Care Act, this new tax is effective January 1, 2013 and applies to wages, compensation and self-employment income above $200,000 for single filers, $250,000 for marrieds filing jointly and $125,000 for marrieds filing separately. The tax also applies to non-cash taxable wages such as company provided group term life insurance over $50,000 and personal use of a company vehicle if an individual is over the applicable threshold.
The additional rate is 0.9 percent, therefore the Medicare tax rate for earned income above the thresholds will increase from 1.45% to 1.54%. An individual will owe Additional Medicare Tax on wages, compensation and self-employment income (and that of the individual’s spouse if married filing jointly) that exceed the applicable threshold for the individual’s filing status. Employers are not required to match the additional tax as they are for the regular medicare tax.
For those that receive paychecks, employers must withhold Additional Medicare Tax from wages it pays to an individual in excess of $200,000 in a calendar year, without regard to the individual’s filing status or wages paid by another employer. Therefore, for joint filers, it will be possible for Additional Medicare Tax to be withheld when no such tax will be due. Individuals liable for the Additional Medicare Tax will calculate the liability on their individual income tax returns (Form 1040) and will report any Additional Medicare Tax withheld by their employers on the 1040. Any Additional Medicare Tax withheld by an employer will be applied against all taxes shown on an individual’s income tax return. For taxpayers treated as self-employed (including partners of partnerships and members of LLCs taxed as partnerships) the new tax will need to be taken into consideration for estimated tax payments.
Whatever happened to tax simplification!