Medicare tax increase effective January 1, 2013
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The IRS has issued guidance regarding the Medicare tax increase that will go into effect next year. Effective January 1, 2013, employers must withhold an additional Medicare tax of 0.9% from the wages of employees who earn $200,000 or more.
According to the FAQ on the IRS website, employers must withhold the additional tax beginning with the pay period in which it pays wages in excess of $200,000 to an employee. The tax applies only to the wages over the $200,000 threshold. There is no requirement to notify employees once the employer begins withholding the additional tax and there is no employer contribution required with respect to the tax. The IRS plans to release revised Forms 941, 943 and the tax return schemas for the Form 94X series of returns.
Couples making more than $250,000 will also be impacted by the tax increase. Currently, the Medicare payroll tax is 2.9% on all wages — with the worker and his employer each paying 1.45%. Under the new law, starting in 2013, high-income individuals will pay another 0.9 percentage points on earned income over $200,000 ($250,000 if married).
In addition, high-income households will also be subject to a new 3.8% Medicare tax on investment income, to include capital gains, dividends, interest, annuities, royalties and rental income. Any investment income that had previously been characterized as “tax exempt” would not be subject to the new tax, however.
Raising the Medicare tax on wages will raise an estimated $87 billion over the next 10 years. Combined this with the new Medicare tax on investment income, and the revenue collected will jump to an estimated $210 billion, making it the biggest single revenue stream to help pay for healthcare reform.
DISCLAIMER: Because of the generality of this update, and based on particular situations, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice, financial advice and/or the advice of a licensed insurance or certified human resource professional.
© Connelly, Carlisle, Fields & Nichols 2012