Medicare Surtax for High-Income Employees

Since the beginning of last year, employers have been required to withhold an additional nine-tenths of a percent for the Medicare surtax for high-income employees. The rules are somewhat complicated, so the IRS recently updated its frequently-asked questions on how it works. The classes of employment and types of payments which are subject to Medicare, as well as Social Security and FUTA, are spelled out in IRS Publication 15.

The threshold for those filing married jointly, at $250,000, is only slightly ($50,000) higher than the $200,000 threshold for single taxpayers. However, you must withhold the additional 0.9 percent on earnings over $200,000 for any employee, regardless of filing status. For example: let’s say an employee is earning, say, $210,000, and her spouse is only earning $30,000. Their combined income falls below the $250,000 threshold and thus is not subject to the additional Medicare tax. Even so, you need to withhold the extra $90 on the $10,000 which exceeds the $200,000 threshold.

Curiously, if employees expect to exceed the threshold and request a higher withholding amount in anticipation of the excise tax, they cannot require you to do so. Rather, they can request that you withhold “an additional amount of tax withholding on Form W-4… the additional income tax withholding will be applied against your tax shown on [the employee’s] individual income tax return,” according to the IRS.

If it is clear that an insufficient amount will be withheld to cover the extra tax, you (or employees, if applicable) can simply make estimated quarterly tax payments. While they cannot be specifically designated to cover the extra Medicare liability, it will all shake out when the taxpayers file their 1040 tax forms.

Here are some additional pointers on your obligations with respect to withholding the “additional Medicare tax:”

• If you fail to withhold enough from employee earnings to cover the additional Medicare tax, and the employee doesn’t pay that amount himself, you are obligated to pay it.
• Even if it turns out that the employee was not liable for an amount you failed to withhold, you’re not off the hook. “The employer that [fails to] meet its withholding, deposit, reporting, and payment responsibilities for additional Medicare tax may be subject to all applicable penalties,” the IRS warns.
• You are not required to notify employees if you begin to withhold additional amounts to cover the additional Medicare tax liability.
• If an employee earning more than $200,000 asks you not to withhold the additional 0.9 percent because he’s married and filing a joint return and doesn’t expect the combined amount to top $250,000, must you accede to his or her wishes? No. You must still withhold the extra amount.
• Suppose an employee’s total compensation exceeds $200,000, but some of that amount comes from taxable employee benefits. How do you deal with withholding the additional 0.9 percent? The same way you compute regular payroll taxes on the amount below $200,000.

Contact GTM Payroll Services or your accountant if you are uncertain as to whether you have met your “additional Medicare tax” withholding responsibilities.