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IRS Posts FAQs on New Medicare-Tax Withholding

The IRS has posted a set of FAQs to its website that provide guidance on withholding the new 0.9% Medicare tax that will apply beginning in 2013.

The new tax was enacted as part of health care reform and goes into effect with respect to wages paid on or after January 1, 2013. The tax is an additional 0.9% on all wages received in excess of a threshold amount. The threshold amount is $200,000 in the case of a single individual and $250,000 in the case of a married individual who files a joint tax return. But regardless of an employee's marital status or household income, employers are required to begin withholding the tax once they have paid an employee $200,000 in wages during a year.

Example. An employee has received $180,000 in wages during 2013 and then receives a bonus of $50,000 in December 2013. In addition to all other required tax  withholding, the employer must withhold the new 0.9% Medicare tax on $30,000 of the bonus.

Some of the clarifications provided in the FAQs:

  • The obligation to withhold the new tax only applies once an employee has received $200,000 in wages and only to the extent wages for the year exceed $200,000. 
  • Non-cash taxable fringe benefits provided to an employee who has received at least $200,000 in other taxable wages are subject to the new tax, even though not paid in cash.
  • The withholding requirement does apply to tipped employees who receive more than $200,000 in taxable wages. Withholding is handled in the same manner as general income- and FICA-tax withholding for tipped employees. (For prior coverage of tax withholding for tipped employees, click here.)
  • The withholding requirement applies to nonqualified deferred compensation at the same time as general FICA-tax withholding (i.e., upon the earlier of the date the services are performed or the date the deferred compensation is no longer subject to a substantial risk of forfeiture).
  • If an individual works for multiple related employers, each entity is treated separately for purposes of applying the new tax (i.e., no withholding applies to an employer until that employer has paid $200,000 in wages), unless the wages are paid by a common paymaster. 

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Don Berner, the Labor Law, OSHA, & Immigration Law Guy
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Boyd Byers, the General Employment Law Guy
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Jason Lacey, the Employee Benefits Guy
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