IRS Releases New Information About Medicare Tax Surcharges

Starting January 1, 2013, two new tax “surcharges” will apply to income earned by individuals making more than $200,000 per year. These Medicare surcharges were enacted as part of health care reform, and are not part of the “fiscal cliff” or ongoing tax negotiations. We’ve been expecting more information from the IRS about how these new taxes will be administered. That information appeared today, in the form of two proposed Treasury Regulations and an FAQ.

0.9% Medicare surcharge on wages

The IRS released a lovely FAQ today about the 0.9% surcharge that applies wages, self-employment earnings and other compensation above $200,000 (single filers) / $250,000 (joint filers). When this surcharge applies to wages, employers are required to withhold it, but the withholding rules are a bit strange. Taxes won’t be withheld until you receive that first dollar in compensation in excess of $200,000; taxes might be withheld even if the surcharge won’t ultimately apply to you because your spouse is not employed; and taxes might not be withheld even if the surcharge will apply to you, because you and your spouse together earn more than the threshold. The FAQ explains these peculiar rules, both from the employee’s and the employer’s perspective.

3.8% Medicare surcharge on net investment income

The IRS released proposed regulations delving into the details of this more complex tax. The tax applies to the “net investment income” of those earning more than $200,000 (single filers) / $250,000 (joint filers), to the extent that “net investment income” exceeds those thresholds. This tax also applies to the net investment income of trusts over certain thresholds. One of the difficult aspects of this tax is understanding what is and is not “net investment income.” Some examples:


The proposed regulation appears to answer a number of questions that the law itself had left unclear, so we as tax professionals should now be in better position to answer questions relating to this surcharge.

So… if you have any questions about how either of these Medicare surcharges applies to you, please contact your Perkins & Co professional! We know more today than we did yesterday.

Author: Susan Sterne, CPA, Principal

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6 Responses to “IRS Releases New Information About Medicare Tax Surcharges”

  1. Peggy Wingard

    Our company has 1 employee that makes over the $200,00 yearly wages. He is married so should be a joint filer. Does that mean the medicare tax surcharge will begin calculating at 250,00 instead of the $200,00 for a single filer?

    Reply
    • Susan Sterne

      Peggy – actually no! You must impose the surcharge at $200,000 regardless of his tax filing status. This is one of the oddities of the surcharges – they could be over- or under-assessed, because employers are required to use the $200K cut-off regardless of the employee’s individual situation. Any excess Medicare surcharges imposed will be available as income tax payments for the employee, and any shortfall will be assessed on the individual’s income tax return as well. So, the employee can adjust their federal income tax withholding up or down as necessary to prevent over- or under-withholding overall; however, that would likely require the individual to prepare or get help in preparing an individual tax projection in order to know whether or by how much they will be off.

      Hope this helps!

      Reply
      • Sheryl Hillebrand

        So will the surcharge be filed in the Medicare payments or federal withholding category on the W2 form?

        Reply
        • Susan Sterne

          If the surcharge on wages over $200,000 is assessed by an employer, it will be included along with normal Medicare withholding in box 6 of the W-2. Paycheck stubs may list the two Medicare tax assessments separately, however, depending on payroll service or system.

          Although the Medicare surcharge on wages will be reported along with other Medicare withholding in box 6 of the W-2, any amount in excess of the required amount will be available as a credit against income tax. Filers with wages of $200,000 or more will file a new form reporting their income subject to the additional 0.9% Medicare tax, which will compute the amount they actually owe. If the amount withheld was too much or too little, the excess will carry over to their individual return on Form 1040 and be available as a credit; any shortfall will be assessed on Form 1040 as additional tax due.

          Reply
  2. tax act

    Very well written article. It will be valuable to anyone who utilizes it, as well as me. Keep up the good work – I will definitely look for more posts. 🙂

    Reply

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