The Patient Protection and Affordable Care Act (PPACA) provided a number of new taxes to help finance the new health care law. One such tax is an additional Medicare tax on high earners that takes effect for tax years beginning after 2012. To assist taxpayers and employers in implementing the collection of the new tax, the Internal Revenue Service (IRS) recently issued 20 questions and answers and published them to their website at http://www.irs.gov/business/small/article/0,,id=258201,00.html
A sample of the Q&As include:
What is the rate of tax? Answer: 0.9%
What individuals are liable? Answer: Individuals with wages, compensation or self-employment income exceeding a threshold of $250,000 for married taxpayers filing joint; $125,000 for married filing separately; $200,000 for singles; $200,000 for head of household; or $200,000 for a qualifying widow with a dependent child.
Employers should begin planning now for payroll tax system changes necessary to implement the collection of the new Medicare tax. The Q&As clarify a couple of points. First, that the employer is not required to notify employees that it is going to begin collecting the additional Medicare tax and second, that there is no employer match as there is with the regular Medicare tax (which is now collected on unlimited wages). In addition, employers are not required to begin withholding the additional Medicare tax until the pay period in which it has paid wages in excess of $200,000 to an employee (even if the employee may not be liable for the tax when filing a joint tax return).
The Q&As describe procedures for handling a number of anticipated situations where employees will receive various forms of compensation (i.e., tips, excess group term life insurance, and other fringes) which put the individual over the $200,000 threshold and how these amounts are to be reported. The Q&As clarify that non-qualified deferred compensation amounts are subject to the additional Medicare tax at the same time that the regular Medicare tax is due on these amounts and then only if the combined regular wages and the deferred compensation income exceed the $200,000 threshold. The Q&As explain rules for common paymasters and controlled groups.
The IRS is revising Forms 941, 943, and other payroll based reporting forms to accommodate the changes required by the PPACA. As some employers pay substantial executive bonuses in the first quarter of each calendar year, payroll tax changes will need to be implemented early in order to comply with the new requirements.