IRS has followed up on its earlier issuance of a draft version of Form 8959 with a draft of the form’s instructions. The form is used to figure out the amount of additional Medicare tax that a taxpayer owes and the amount of additional Medicare tax that was withheld by the taxpayer’s employer, if any.
Background – tax on employee compensation. Under the 2010 Patient Protection and Affordable Care Act (PPACA, P.L. 111-148), effective for tax years beginning after 2012, there’s an additional 0.9% Medicare tax on taxpayers (other than corporations, estates, or trusts) receiving wages with respect to employment in excess of $200,000 ($250,000 for married couples filing jointly and $125,000 for married couples filing separately). (Code Sec. 3101(b)(2)) These amounts aren’t indexed for inflation.
The tax is in addition to the regular Medicare rate of 1.45% on wages received by employees with respect to employment. The tax only applies to the employee portion of the Medicare tax. The employer Medicare tax rate remains at 1.45%, and the employer and employee Social Security tax remain at 6.2%.
Employers must begin withholding the additional Medicare tax once an employee’s wages exceed $200,000, even if the employee may not ultimately be liable for the additional tax (e.g., employee earns $210,000, his spouse earns $25,000, and they file a joint return). (Code Sec. 3102(f)(1)) Any excess additional Medicare tax withheld will be credited against the total tax liability shown on the employee’s income tax return.
Conversely, the 0.9% additional Medicare tax may be owed on the employee’s income tax return where withholding is not collected for it (e.g., employee earns $175,000 and her spouse earns $150,000, or employee earns more than $200,000 and employer simply fails to withhold). (Code Sec. 3102(f)(2)) If an employer fails to withhold the 0.9% additional Medicare tax, and the tax is subsequently paid by the employee, IRS will not collect the tax from the employer. However, the employer will remain subject to any applicable penalties or additions to tax for failure to withhold the 0.9% additional Medicare tax as required. (Code Sec. 3102(f)(3))
Background -tax on self-employment income. The Medicare tax on self-employment income for any tax year beginning after Dec. 31, 2012, is increased by an additional 0.9% on self-employment income which exceeds the same thresholds as apply for employees (see above). (Code Sec. 1401(b)(2)(A)) The $250,000, $125,000, and $200,000 thresholds are reduced (but not below zero) by the amount of wages taken into account in determining the additional 0.9% tax on wages. (Code Sec. 1401(b)(2)(B))
In November, 2012, IRS issued proposed regs on the additional Medicare tax. It recently followed up with final regs, which largely adopted the proposed regs.
Who must file. The draft instructions clarify that a taxpayer must file Form 8959 if one or more of the following apply:
- Medicare wages and tips on any single Form W-2, box 5, exceed $200,000.
- Railroad retirement (RRTA) compensation on any single Form W-2, box 14, exceeds $200,000.
- Total Medicare wages and tips plus self-employment income (including the Medicare wages and tips and self-employment income of your spouse, if married filing jointly) exceed the threshold amount.
- Total RRTA compensation and tips on Form W-2, box 14 (including the RRTA compensation and tips of your spouse, if married filing jointly) exceed the threshold amount.
The draft instructions also state that if a taxpayer is a nonresident alien or U.S. citizen living abroad, he is required to pay additional Medicare tax on Medicare wages, RRTA compensation, and self-employment income that exceed the applicable threshold, without regard to the taxpayer’s domicile or citizenship. A number of examples to illustrate the above are also provided in the draft instructions.
Income tax withholding and estimated tax payments for 2014. The draft instructions also provided general guidance on issues relating to withholding and estimated tax payments. If the amount withheld by an employer is insufficient, a taxpayer may request that the employer withhold an additional amount of income tax by filing a new Form W-4, Employee’s Withholding Allowance Certificate, with the employer. Although a taxpayer can’t request additional withholding specifically for additional Medicare tax, the additional withholding will be applied against the taxes shown on the return, including any additional Medicare tax liability. A taxpayer can also make estimated tax payments. However, the draft instructions provide that, in general, a taxpayer does not have to make estimated tax payments if he expects that his 2014 return will show a tax refund or tax balance due of less than $1,000.
The draft instructions also provide line-by-line instructions on how to fill out the form and, specifically, how to reconcile the amount of additional Medicare tax withheld with the amount owed.