The following questions and answers provide employers and payroll service providers information that will help them as they prepare to implement the Additional Medicare Tax which goes into effect in 2013. The Additional Medicare Tax applies to individuals’ wages, other compensation, and self-employment income over certain thresholds; employers are responsible for withholding the tax on wages and other compensation in certain circumstances. The IRS has prepared these questions and answers to assist employers and payroll service providers in adapting systems and processes that may be impacted.
When does Additional Medicare Tax start?
Additional Medicare Tax goes into effect for taxable years beginning after December 31, 2012.
What is the rate of Additional Medicare Tax?
The rate is 0.9 percent.
When are individuals liable for Additional Medicare Tax?
An individual is liable for Additional Medicare Tax if the individual’s wages, other compensation, or self-employment income (together with that of his or her spouse if filing a joint return) exceed the threshold amount for the individual’s filing status:
Filing Status Threshold Amount
Married filing jointly $250,000
Married filing separately $125,000
Head of household (with qualifying person) $200,000
Qualifying widow(er) with dependent child $200,000
What wages are subject to Additional Medicare Tax?
All wages that are currently subject to Medicare Tax are subject to Additional Medicare Tax if they are paid in excess of the applicable threshold for an individual’s filing status. For more information on what wages are subject to Medicare Tax, see the chart, Special Rules for Various Types of Services and Payments, in section 15 of Publication 15, (Circular E), Employer’s Tax Guide.
What Railroad Retirement Tax Act (RRTA) compensation is subject to Additional Medicare Tax?
All RRTA compensation that is currently subject to Medicare Tax is subject to additional Medicare Tax if it is paid in excess of the applicable threshold for an individual’s filing status.
Are wages paid to employees that are nonresident aliens or U.S. citizens living abroad subject to Additional Medicare Tax withholding?
There are no special rules for nonresident aliens and U.S. citizens living abroad for purposes of this provision. Wages earned by such individuals that are subject to Medicare tax will be subject to Additional Medicare Tax withholding if paid in excess of the $200,000 withholding threshold.
EMPLOYER and PAYROLL SERVICE PROVIDER FAQs
When must an employer withhold Additional Medicare Tax?
The statute requires an employer to withhold Additional Medicare Tax on wages or compensation it pays to an employee in excess of $200,000 in a calendar year. An employer has this withholding obligation even though an employee may not be liable for the Additional Medicare Tax because, for example, the employee’s wages or other compensation together with that of his or her spouse (when filing a joint return) does not exceed the $250,000 liability threshold. (See Q&A-3.) Any withheld Additional Medicare Tax will be credited against the total tax liability shown on the individual’s income tax return (Form 1040).
Is an employer required to notify an employee when it begins withholding Additional Medicare Tax?
No. There is no requirement that an employer notify its employee.
Is there an “employer match” for Additional Medicare Tax (as there is with the regular Medicare tax)?
No. There is no employer match for Additional Medicare Tax.
May an employee request additional withholding specifically for Additional Medicare Tax?
No. However, an employee who anticipates liability for Additional Medicare Tax may request that his or her employer withhold an additional amount of income tax withholding on Form W-4. This additional income tax withholding will be applied against all taxes shown on the individual’s income tax return (Form 1040), including any Additional Medicare Tax liability.
If an employee’s annual Medicare wages are expected to be over $200,000, will an employer withhold Additional Medicare Tax from the beginning of the year or only after Medicare wages are actually paid in excess of $200,000 year-to-date?
An employer is required to begin withholding Additional Medicare Tax in the pay period in which it pays wages in excess of $200,000 to an employee.
If a single payment of wages to an employee exceeds the $200,000 withholding threshold, will an employer withhold Additional Medicare Tax on the entire payment?
No. Additional Medicare Tax withholding applies only to wages paid to an employee that are in excess of $200,000 in a calendar year. Withholding rules for this tax are different than the income tax withholding rules for supplemental wages in excess of $1,000,000 as explained in Publication 15, section 7.
Example: M received $180,000 in wages through November 30, 2013. On December 1, 2013, M’s employer paid her a bonus of $50,000. M’s employer is required to withhold Additional Medicare Tax on $30,000 of the $50,000 bonus and may not withhold Additional Medicare Tax on the other $20,000. M’s employer also must withhold Additional Medicare Tax on any other wages paid in December 2013.
What should an employer do if an employee receives wages or other compensation that is not paid in money, such as fringe benefits, from which Additional Medicare Tax cannot be withheld?
If an employee receives wages from an employer in excess of $200,000 and the wages include noncash fringe benefits, the employer calculates wages for purposes of withholding Additional Medicare Tax in the same way that it calculates wages for withholding the existing Medicare tax. The employer is required to withhold Additional Medicare Tax on total wages, including noncash fringe benefits, in excess of $200,000. The value of noncash fringe benefits must be included in wages and the employer must withhold the applicable Additional Medicare Tax and deposit the tax under the rules for employment tax withholding and deposits that apply to noncash fringe benefits. The same rules apply for compensation subject to Railroad Retirement Tax Act (RRTA) taxes. Additional information on how to withhold tax on noncash fringe benefits is available in Publication 15 (Circular E), section 5, and Publication 15-B, section 4.
If an employee will receive tips and wages in excess of $200,000 in the calendar year, how is Additional Medicare Tax paid on the tips?
To the extent that tips and wages exceed $200,000, an employer applies the same withholding rules for Additional Medicare Tax as it does currently for Medicare tax. An employer withholds Additional Medicare Tax on the employee’s reported tips from wages it pays to the employee. If the employee does not receive enough wages for the employer to withhold all the taxes that the employee owes, including Additional Medicare Tax, the employee may give the employer money to pay the rest of the taxes. The employee may need to make estimated tax payments to cover any shortage. More information about this process of giving an employer money for taxes is available in Publication 531, Reporting Tip Income.
If a former employee receives group-term life insurance coverage in excess of $50,000 and the resulting income is in excess of $200,000, how does an employer report Additional Medicare Tax on this?
The imputed cost of coverage in excess of $50,000 is subject to social security and Medicare taxes, and to the extent that in combination with other wages it exceeds $200,000, it is also subject to Additional Medicare Tax. When group-term life insurance over $50,000 is provided to an employee (including retirees) after his or her termination, the employee share of social security and Medicare taxes and Additional Medicare Tax on that period of coverage is paid by the former employee with his or her tax return and is not collected by the employer. An employer should report this income as wages on Form 941, Employer’s QUARTERLY Federal Tax Return (or the employer’s applicable employment tax return), and make a current period adjustment to reflect any uncollected employee social security, Medicare, or Additional Medicare Tax on group-term life insurance. However, unlike the uncollected portion of the regular (1.45%) Medicare tax, an employer may not report the uncollected Additional Medicare Tax in box 12 of Form W-2 with code N.
For employees who receive third-party sick pay, will wages paid by an employer and by the third party need to be aggregated to determine whether the $200,000 withholding threshold has been met?
Yes. Wages paid by an employer and by the third party need to be aggregated to determine whether the $200,000 withholding threshold has been met. The same rules that currently assign responsibility for sick pay reporting and payment of Medicare tax based on which party is treated as the employer (i.e., the employer, the employer’s agent, or a third party that is not the employer’s agent) apply also to Additional Medicare Tax. For more information on sick pay, see Publication 15-A, Employer’s Supplemental Tax Guide, and Notice 91-26, 1991-2 C.B. 619.
If an employee has amounts deferred under a nonqualified deferred compensation (NQDC) plan, when is the nonqualified deferred compensation taken into account as wages for purposes of withholding Additional Medicare Tax?
An employer calculates wages for purposes of withholding Additional Medicare Tax from nonqualified deferred compensation (NQDC) in the same way that it calculates wages for withholding the existing Medicare tax from NQDC. Thus, if an employee has amounts deferred under a nonqualified deferred compensation plan and the NQDC is taken into account as wages for FICA tax purposes under the special timing rule described in §31.3121(v)(2)-1(a)(2) of the Employment Tax Regulations, the NQDC would likewise be taken into account under the special timing rule for purposes of determining an employer’s obligation to withhold Additional Medicare Tax. Additional information about the special timing rules for NQDC is in Publication 957, Reporting Back Pay and Special Wage Payments to the Social Security Administration.
Should an employer combine an employee’s wages for services performed for all of its subsidiaries if it has an employee who performs services for more than one subsidiary in its company, but the payroll is paid through one of the subsidiaries?
An employer is required to withhold Additional Medicare Tax on wages paid to an employee in excess of $200,000 in a calendar year. When an employee is performing services for multiple subsidiaries of a company, and each subsidiary is an employer of the employee with regard to the services the employee performs for that subsidiary, the wages paid by the payor on behalf of each subsidiary should be combined only if the payor is a common paymaster. Publication 15-A, section 7 contains more information on common paymasters. The wages are not combined for purposes of the $200,000 withholding threshold if the payor is not a common paymaster.
Should an agent combine an employee’s wages for purposes of determining whether wages are paid in excess of the $200,000 withholding threshold, if it is an agent for two employers (with approved Forms 2678, Employer Appointment of Agent), and it pays wages to an employee that performs services for both employers?
No. An agent with approved Forms 2678 acting as an agent for two employers should not combine the wages paid on behalf of the separate employers in determining whether to withhold Additional Medicare Tax.
Will the IRS be changing Form 941 or any other forms to be completed by employers and payroll service providers?
Yes. The IRS plans to release drafts of revised forms, including Forms 941, 943, and the tax return schemas for the F94X series of returns.
For more information, visit the IRS website here
U.S. Citizenship and Immigration Services (USCIS) announced that employers should continue using the current version of Form I-9 even after the expiration date on the form of August 31, 2012 has passed. The agency recently proposed several revisions to Form I-9 and stated it will provide updated information about the new version of the Form I-9 as it becomes available. With the I-9 back in the news again, now is the perfect time to go over some tips and best practices to keep your business I-9 compliant should the government surprise you with an audit. U.S. Immigration and Customs Enforcement (ICE) reported five times as many audits in the last three years compared to 2008 and more than $9 million in fines for I-9 violations.
USCIS Proposed Revisions to Form I-9
The new Form I-9 will most likely be 80 percent larger than the current version, increasing the form from a five-page document to nine pages. Key revisions under review on the I-9 form include:
- Expanded instructions and a revised layout.
- Optional data fields to collect the employee’s email address and telephone number.
- New data fields to collect the foreign passport number and country of issuance (for aliens authorized to work in the U.S. who have also recorded their I-94 admission number on Form I-9).
USCIS will post information regarding a new Form I-9 on I-9 Central once the form has been finalized. Until a new version is approved and posted, employers must continue to use the current version of the I-9 form even after August 31, 2012.
Form I-9: Who, What and When
Federal law requires employers to hire only individuals who may legally work in the United States… either U.S. citizens or foreign citizens who have the necessary authorization. To comply with the law, employers must verify the identity and employment authorization of each person they hire by completing and retaining Form I-9, Employment Eligibility Verification.
Form I-9 consists of three sections:
1. Employees complete Section 1, Employee Information and Verification.
Newly hired employees must complete and sign Section 1 of Form I-9 no later than the first day of work for pay. Employers may have employees complete Form I-9:
On the first day of work for pay.
Before the first day of work, if the employer has offered the individual a job and if the prospective employee has accepted it.
Employees can have help completing Section 1, including using a translator. Employees must sign the form even if a preparer or translator helps them. The preparer or translator who helps the employee must provide his or her name, address, and signature, and date the form.
2. Employers/agricultural recruiters-and-referrers-for-a-fee complete Section 2, Employer Review and Verification.
Employers must complete and sign Section 2 of Form I-9 within three business days of the employee’s first day of work for pay. For example, if the employee started work for pay on Monday, the employer must complete Section 2 by Thursday of that week. If the job lasts less than three days, the employer must complete Section 2 no later than the first day of work for pay.
3. If necessary, employers may complete Section 3, Updating and Reverification, when:
- An employee’s employment authorization or documentation of employment authorization has expired.
- An employee is rehired within three years of the date that Form I-9 was originally completed.
- An employee changes his or her name.
Employers should not reverify:
- U.S. citizens
- Lawful permanent residents (LPRs) who presented a Permanent Resident Card (Form I-551) for Section 2
- List B documents
Acceptable Form I-9 Documents
An employee must show documentation to his/her employer to show their identity and authorization to work. Employers must examine the documentation employees present to complete Section 2 of Form I-9. Employers are not required to be document experts; however, they must accept documents that reasonably appear to be genuine and to relate to the person presenting them.
There are 3 kinds of documents that can be presented to an employer to verify an employee’s identity and authorization to work in the United States.
List A Documents:
The documents on List A show both identity and employment authorization. Employees presenting a List A document should not be asked to present any other document.
List B Documents:
The documents on List B show identity only. Employees who choose to present a List B document must also present a document from List C for Section 2.
List C Documents:
The documents in List C show employment authorization only. Employees who choose to present a List C document must also provide a document from List B for Section 2.
As you may know the State of Indiana will soon have a new smoke-free air law. House Enrolled Act 1149 was signed into law by Governor Mitch Daniels on March 19, 2012 and took effect on July 1, 2012. Under the new law, smoking is prohibited in most places of employment and public places, and within eight feet of a public entrance to these facilities. For your information, here are some links to documents you need:
1.) FAQ’s – Indiana’s New Smoking Law General Information
2.) Requirements - Indiana’s New Smoke-Free Air Law Effect Employers
3.) Signage Requirements – Indiana’s New Smoke-Free Air
4.) Sign - The State Law Prohibits Smoking Within 8 Feet of This Entrance
5.) Sign - Smoking Is Prohibited By State Law
The signs are required at all public entrances of enclosed public places and/or places of employment. Even if your facility is currently a non-smoking facility, you must still post the signs.
I hope that you will find this information helpful and if you have any additional questions, please do not hesitate to contact me. You may also find additional information regarding the new law at www.in.gov/atc.
A new mandated federal regulation will become effective on January 31, 2012 - National Labor Relations Board (NLRB) Posting Requirements
The National Labor Relations Board (NLRB) adopted a rule requiring many private-sector employers to implement new notice-posting requirements regarding employee rights under the National Labor Relations Act. Employers should not expect the requirements to change in any significant way, although the NLRB indicated it intends to clarify the identity of employers subject to the requirements in the intervening months. Most private sector employers will be required to post the 11-by-17-inch notice, which is available at no cost from the NLRB through its website, either by downloading and printing or ordering a print by mail. www.nlrb.gov
On October 5, 2011, the NLRB announced that the date for implementation of the notice-posting requirements has been postponed from November 11, 2011 to January 31, 2012.
Every year, state and Federal agencies make hundreds of labor law changes that directly affect your employees. These changes in regulations impact policies related to minimum wage, anti-discrimination, safety and health protection, child labor laws, workers’ compensation and more. Sometimes the updated government regulations require mandatory new labor law posters… and sometimes they don’t. Failure to display the required workplace posters can result in significant fines and penalties, along with jail time in some instances. So how can you be sure the posters you have are the most current ones?
2011 Minimum Wage Rate Changes Require Updated Posters
The most common change that requires an updated labor law poster is when states change their minimum wage rates. Several states increased their minimum wage rates in January 2011 including Arizona, Montana, Ohio and Washington… just to name a few. And Florida unexpectedly increased their minimum wage rate to $7.31 effective June 1, 2011 which requires an updated labor law notice. So if your business is located in one of those states, make sure your labor law posters are current and display the correct minimum wage rate.
Workplace Policy Changes: A Lot Can Happen in One Year
State minimum wage rate changes aren’t the only reason government agencies mandate updated labor law posters. Sometimes OSHA regulations change and updates to workers’ compensation notices, earned income credit, unemployment compensation and discrimination policies require new workplace posters. How can you tell if a labor law regulation change is mandatory or non-mandatory… meaning a new poster is not required? If your labor law posters were purchased a year ago… prior to June of 2010… and your business is located in one of the following states and you have not received an updated poster, you are most likely out of compliance
Automatic Compliance Updates Keep Your Labor Law Posters Current
The easiest way to make sure your business is compliant and displaying the most current labor law posters is to subscribe to a program which offers a combined Federal and state poster that automatically sends you updates when new notices are mandatory. That way you don’t have to stay on top of all the government changes and worry about what updates require a new poster. It is taken care of for you. All you have to do is replace the old poster when the new one arrives.
On April 14th, President Obama signed H.R. 4, also known as the Comprehensive 1099 Taxpayer Protection and Repayment of Exchange Subsidy Overpayments Act of 2011, a bill repealing the controversial and unpopular 1099 tax reporting requirement mandated by last year’s health care legislation. It is the first provision of the health care reform law to be repealed.
Without the repeal, the tax compliance provision would have required businesses to report on Form 1099-MISC payments to contractors and vendors that total $600 or more annually, starting in 2012. The repeal of this legislation removes the burden of additional paperwork for small business owners and payroll administrators.
Earlier this year, the United States Citizenship and Immigration Services (USCIS) released an updated version of The Handbook for Employers to help employers better understand the Form I-9 process.
The Handbook has been revised with new information regarding applicable rules and policies, new regulations about electronic storage and retention of I-9 forms, how to process an employee with a complicated immigration status and also addresses public comments and frequently asked questions.
Revisions to The Handbook for Employers & Understanding the Form I-9 Process
Some of the many improvements, new sections and tools included in The Handbook for Employers, Instructions for Completing Form I-9 are:
- New visual aids for completing Form I-9
- Examples of new relevant USCIS documents
- Expanded guidance on lawful permanent residents, refugees and asylees, individuals in Temporary Protected Status (TPS), and exchange visitors and foreign students
- Expanded guidance on the processing of employees in or porting to H1-B status and H2-A status
- Expanded guidance on extensions of stay for employees with temporary employment authorization
Verifying Employment Eligibility is Mandatory The Immigration Reform and Control Act of 1986 (IRCA) prohibits the hiring or continued employment of aliens whom employers know are unauthorized to work in the United States. Employers who hire or continue to employ individuals knowing that they are not authorized to be employed in the United States may face civil and criminal penalties.
By law, U.S. employers must verify the identity and employment authorization for every worker they hire after November 6, 1986. To comply with the law, all U.S. employers must verify the employment eligibility and identity of every worker hired by completing Form I-9, Employment Eligibility Verification, regardless of the employee’s immigration status.
Despite the walkout designed to stall legislative advances, House Bill 1450 was signed into law last week. The Bill decreases the tax increase that was to take effect this year, decreases the average benefit amount claimants receive, and reduces eligibility for seasonal employees. It’s hard to be happy about a tax increase, but this bill is a big win for employers because, unlike previous attempts at fixing the problem, this Bill includes logical reductions in benefits and eligibility rather than forcing employers to shoulder the full cost of the problem with tax increases.
The Department has estimated that the changes to seasonal eligibility could reduce the cost of the program by 25-30%, so these changes should mean major changes in the costs for some employers. However, the burden of proving an employee is ineligible remains on the employer, so employers should act now to make sure they have the documents necessary to defend future unemployment claims.
The following employers should review their documentation to ensure they are prepared to take advantage of the new provisions:
- intermittent, part-time, or as needed work force;
- seasonal employers;
- regularly scheduled shutdowns;
- head start organizations.
Under Indiana’s unemployment law, the employer has the burden of proving an individual is ineligible for benefits, so these employees will likely continue drawing unless you present evidence to show they are ineligible.
Taxable Wage Base Increases to $9500.
Tax Rates Increase Less Than Expected.
- Minimum Tax Rate: .5% ($47.50 Per employee per year)
- Maximum Tax Rate: 7.4% ($703 per employee per year)
Under H.B. 1450, all employers will see a lower tax than they would have under the tax increase that was scheduled to take effect this year and some will actually see a tax cut. In 2010, the minimum tax per employee was $77 and the maximum was $392. Under the bill that was passed in 2010, minimum tax would have been $71.25 and the maximum tax would have been $969 per employee per year.
The Department has already sent out merit rate notices for this year. Those notices are now inaccurate, but it’s not clear whether the Department will have time to send out new merit rate notices before the first quarter contributions are due.
2011: Employers will pay a quarterly surcharge equal to 13% of their quarterly contributions.
After 2011: The Department of Workforce Development is authorized to set the rate of the surcharge each year that the state owes interest on loans from the federal unemployment account. The statute is intended to permit the Department to collect enough money to pay interest in light of potential changes in Federal law, but sets no limit on the amount of revenue the Department can collect with the surcharge.
BENEFITS AND ELIGIBILITY
- Maximum Benefit: $390 per week (no change)
- Average Benefit: $220 per week (down from $283 per week)
- Seasonal workers: Significantly reduces eligibility for seasonal workers.
For additional information about these changes or for assistance preparing to take advantage of these provisions, contact Dustin Stohler at email@example.com or (317) 937-7323.
We all say it: “If I could just have another hour in the day I could get THIS done.” The problem is that time management takes work and discipline! We need a process to get all the things done, so here are some simple ideas to consider as you prepare to tackle what’s in store for you and your business in 2011
Have Homeroom Each Day
Hey, having homeroom each day worked in school, why would we NOT do it in the office? The best way to get your day off started on the right foot is to get your team together for 15 minutes at the beginning of each day, making sure everyone knows and understands their priorities for the day, and has no obstacles in getting them done. This typically will alleviate late day fires (for you and for them), and makes sure everyone knows what needs to be completed before the end of the day. If your team is just you, this is still a good exercise to prevent disappointment and problems at the end of the day.
The most unproductive time is spent doing bits and pieces of projects throughout the day. This is most obvious with email and phone calls. Pick 2-3 times per day where you check and respond to your emails. Do the same with phone calls. You will find that batching these tasks will give you enormous amounts of time back into your day.
For business owners this is one of the hardest things to do because we do everything better than others, right? Well even if that is the case, that doesn’t mean we should. As a business owner, we should be doing the things that only we can do as business owners. A great test is if you find a task that you are doing multiple times in a week (maybe even in a month), you can typically find someone to do that for you. Be creative with this. You don’t have to look just inside your office for the solution. You can outsource many tasks to resources better equipped and better trained to handle your needs.
Make sure you get the most critical things done each day. Sometimes tasks are small but critical and get lost in the shuffle as a result. Use one of our tips above and batch those together as well. There is nothing more satisfying than quickly crossing off important things you have gotten done each day.
At The Payroll Department, Inc. we see it as our purpose to give time back to you each month by handling the issues of your payroll for you. Even if you are using another company, typically you or your employees are still addressing issues that we handle for our clients. We make payroll simple for you - because payroll is all we do.
On behalf of our staff at The Payroll Department, Inc. we want to wish you a very Happy Holiday and a safe and prosperous 2011.
The IRS announced a reduction in 2010 FUTA (Federal Unemployment Tax Act) credit for Michigan, South Carolina and Indiana, resulting from unpaid federal loans. This reduction means an overall increase in the FUTA taxes for these states.
Employers are required to pay a flat rate of 6.2% on the first $7,000 of each employee’s annual wages; however, a credit of 5.4% is received for paying state unemployment on time. The Social Security Act requires a reduction in the FUTA tax credit when a state has outstanding federal loans for two consecutive Januarys. The reduction in the FUTA tax credit is 0.3% for the first year and an additional 0.3% for each succeeding year until the loan is repaid.
South Carolina: An additional $21 per employee ($7,000 × 0.3% = $21) this first year. Indiana: An additional $21 per employee ($7,000 × 0.3% = $21) this first year. Michigan: An additional $42 per employee ($7,000 × 0.6% = $42) this second year.
The FUTA credit reduction will become elective retroactive to January 1, 2010 and will be due on federal IRS Form 940 by January 31, 2011.