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Update: For more recent SHRM Online articles on this topic, please Employer Obligations for the Additional Medicare Tax (December 2013) and FICA Adjusts: Income Subject to Payroll Tax Increases in 2014 (updated January 2014).
New Medicare taxes on high earners, imposed under the Patient Protection and Affordable Care Act (PPACA or ACA), mean big changes in wage withholding, executive compensation and personal financial planning for these employees.
Additional Wage Withholding Required in 2013
For taxable years beginning after Dec. 31, 2012, employers will be required to withhold additional amounts from the wages of high-earning employees. The Medicare tax rate will increase by .9 percent (from 1.45 percent to 2.35 percent) on wages over $200,000 for single filers, wages over $250,000 for joint filers, and wages over $125,000 for persons who are married but filing separately.
According to the Internal Revenue Service's Questions and Answers for the Additional Medicare Tax (issued in June 2012), employers are required to withhold this additional Medicare tax if an employee receives wages of more than $200,000 from that particular employer. Employers are not required to consider a spouse's wages or whether an employee earns wages at a second job.
There is no employer match for the additional Medicare tax, and no requirement that an employer notify employees when it begins withholding the additional Medicare tax. An employer is required to begin withholding the additional tax in the pay period in which it pays wages in excess of $200,000 to an employee.
The IRS said it does not plan to add additional boxes to Form W-2 for the additional Medicare tax on wages in excess of $200,000. Employers will report aggregate Medicare wages in Box 5 and the aggregate Medicare tax in Box 6.
New Tax on High Earners' Investment Gains
In addition, the PPACA imposes a new Medicare tax on high earners' investment income, to be reported and paid as part of their annual income tax filing.
Beginning with tax year 2013 , single taxpayers who earn more than $200,000 and married taxpayers with combined income of more than $250,000 will face a new 3.8 percent Medicare tax on their investment gains. The tax will apply to investment income including interest, dividends, capital gains, rents, royalties and the taxable portion of an annuity payout. As a result, high earners may have to rethink their short and long-term financial strategies.
"Employers can provide clarity through financial education to help prepare highly compensation employees for these changes," said Lynn Pettus, national director of employee financial services at Ernst & Young LLP. "Offering year-end planning seminars or webinars can provide clarification and ease stress," she advised. "If employees receive objective guidance and a better understanding of the impending tax environment, both the employer and the workforce benefits."
Stephen Miller, CEBS, is an online editor/manager for SHRM.
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