As the year draws to a close, now is the time to ensure the tax withholding ducks are all in a row. It’s far more challenging to correct tax withholding mistakes after year-end than before, so if there are any areas that need audit or attention, this is the moment of truth – you may still have a pay period to make those corrections. Along those lines, the IRS recently released additional clarification on procedures related to the additional medicare tax withholding that was implemented this year. In today’s blog I’ll highlight some highlights from the IRS’s Q&A.

A Quick Recap

To recap in a nutshell – we should all be aware by now that beginning January 1, 2013, an “additional” Medicare withholding tax went into effect for high earners. Essentially, employers need to collect an additional 0.9% of Medicare tax on wages in excess of $200,000. Ultimately the threshold for the tax to kick in is $250,000 of income for a married couple and $200,000 for individuals, but employers are not required to gather any information to determine the employee’s true liability. That at least keeps it easy – anything over $200,000 in wages will incur the additional tax from an employer perspective. That recapped, there are some nuances you’ll want to make sure you’ve accurately interpreted this year.

Employees can’t voluntarily increase their medicare withholdings

The IRS’s Q&A clarified that employees can’t request to increase their Medicare withholdings. Why would this be a question? I could see a family where two earners each make $150,000 in wages, but neither exceeds the individual $200,000 income amount that would trigger additional withholding by their employer. Together they make $300,000, so they would owe 0.9% in additional medicare taxes on $50,000 of income. One or both employees may consider approaching their employer close to year end to request additional Medicare taxes be withheld to satisfy the higher obligation they will have on their last $50,000 of combined income. The IRS has nixed the ability to do this. However, there may be a solution – employees can complete a W-4 Form to increase their income tax withholdings. They just can’t specifically request to withhold additional Medicare.

The definition of wages includes non-cash fringe benefits

Ensuring year-to-date income amounts are contemplated in withholding has long been a balancing act. The additional medicare becomes another tax where an income threshold must be monitored and considered. One important piece to remember is that non-cash fringe benefits are also included in the year-to-date wage threshold, so those components need to be included in any year-to-date income calculations. It may be worth checking with Payroll to ensure those fringe benefits have been included in year-to-date figures.

Employees will have to file Form 8959 with the IRS if additional Medicare tax is withheld

Even though employers will be reporting the Additional Medicare Tax on the employee’s Form W-2, employees will still need to file Form 8959 with the IRS to essentially reconcile their Medicare tax liability. This is where they would determine any additional amounts due, or any overpayments made. This is probably news to most employees, who probably haven’t considered that they will need to file any type of form reporting Medicare payments to the IRS.

Employers can’t stop withholding the additional Medicare tax once the $200,000 income threshold has been reached and withholding is required.

Once the additional Medicare tax kicks in, the employer cannot stop withholding that tax for the remainder of the calendar year. A likely scenario would be where an employee’s combined income with their spouse won’t exceed the $250,000 income amount for couples, but the individual employee’s income will exceed $200,000 and withholding of the additional tax is required for the spouse that will exceed $200,000. The employee may present a case that their combined income won’t trigger the tax, but employers will still have to withhold based on the employee’s individual income situation. The employee will need to complete Form 8959 to get a credit back for the additional Medicare withholdings. As far as I can tell, Form 8959 is still in draft form and the final hasn’t been released (please, someone correct me if that’s not the case).

Now is the time to ensure your withholdings are in order before the end of the year. You may also consider including some of the above points and examples in your year-end employee communications.

-Jennifer