One of the more less understood and communicated aspects of the Affordable Care Act, the Medicare surtax can potentially be a pitfall for small to medium sized businesses. That’s why we wanted to take a minute to cover exactly what this tax encompasses and who is affected. Following are the guidelines for employer obligations related to the ACA and the Medicare Surtax.
Essentially, under the Affordable Care Act (Obamacare), high earners will be subject to an additional .9% Medicare tax (on amounts earned above the following thresholds) by the IRS. The thresholds for this vary by filing status.
– For single individuals, those with wages and/or self-employment earnings above $200,000 will be subject to this additional ACA Medicare Surtax.
– For married couples filing separately, those with wages and/or self-employment earnings above $125,000 will be subject to this additional ACA Medicare Surtax.
– For married couples filing jointly, those with wages and/or self-employment earnings above $250,000 will be subject to this additional ACA Medicare Surtax.
– For heads of household with a qualifying person, those with wages and/or self-employment earnings above $200,000 will be subject to this additional ACA Medicare Surtax.
– For Widow(ers) with a dependent child, those with wages and/or self-employment earnings above $200,000 will be subject to this additional ACA Medicare Surtax.
While the entire scope of this legislation and the resulting tax obligations can be referenced in IRS Publication 15, one key aspect to understand is that employers must withhold the .9% tax on all earnings over $200,000 for any employee, regardless of filing status (even if the combined married household joint filing status income is less than the $250,000 limit – e.g. one spouse makes $220,000 and the other makes $20,000).
Note that if any of your employees expect to exceed the aforementioned thresholds (individually or jointly), they can they can request you withhold an additional amount of tax withholding on their W-4, but cannot require you as the employer to do so in anticipation.
Ultimately, the key to this legislation is understanding and adhering to the provided thresholds and taking the necessary withholding precautions to ensure having enough to cover this surtax. This might include estimated quarterly payments, but these payments cannot be specifically designated as covering the additional Medicare surtax liability (rather only applied).
Failure to withhold enough from employee earnings to cover the ACA Medicare surtax places the liability for the tax on you as the employer (if the employee hasn’t made other arrangements to satisfy the outstanding amount). In fact, any employer that fails to meet the withholding, reporting and payment responsibilities associated with this tax may be subject to not only the shortfall, but additional penalties as well.
So, the simplest path to compliance is to follow your responsibilities (and rights) and withhold the additional .9% of an income over the $200,000 threshold, regardless of the employee’s requests. If you have any questions about dealing with payroll and this high earner surtax, contact Lescault and Walderman at 866-496-2042.
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