Toll Free: 877.880.4477                           Phone: 281.880.6525IRS Provides Guidance on the New 0.9        Percent M...
The IRS recently issued much-anticipated guidance on the new 0.9 percentMedicare tax on wages and self-employment income. ...
Basics on the New TaxBefore 2013, the Medicare tax on salary and net self-employment (SE)income was a flat 2.9 percent.• I...
1 Impact on Employees:1  » If you are a higher-income employee, your employer must withhold    the new 0.9 percent Medicar...
2 Impact on Self-Employed Individuals:2  » If you are a higher-income self-employed person, you will pay the    new 0.9 pe...
3 Impact on Estimated Tax Payment Obligations:3  » If you owe the new 0.9 percent Medicare tax, you should take it into   ...
Highlights from the New IRS GuidanceThe recently issued IRS guidance on the new 0.9% Medicare tax comes inthe form of so-c...
Example 1: George is a married joint-filer. In 2013, he earns a salary of$249,000. He has no other wage or SE income. His ...
Example 2: Jill is a married-joint filer. In 2013, she earns a salary of $180,000. Her husband earns $140,000. Jill and he...
What Kinds of Employee Compensation Are Subject to the Tax?The proposed regulations merely say the new 0.9 percent Medicar...
3 Third-party sick pay - Wages paid by an employer and by the third party 3   must be aggregated to determine whether the ...
Do You Have Both Wage and Self-Employment Income?If you have both wage income subject to federal employment tax withholdin...
Example 4: Linda is unmarried. For 2013, she has $160,000 of wages subject to the "regular" Medicare tax. Because her wage...
14550 Torrey Chase, Suite 100 Houston, TX 77014 USA             Toll Free : 877.880.4477             Phone : 281.880.6525 ...
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IRS Provides Guidance on the New 0.9 Percent Medicare Tax

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Human Resource & Payroll Services And Solutions - Houston, Dallas, Austin - Texas www.hrp.net. Two new surtaxes are kicking in on January 1, 2013 for some taxpayers. These taxes have nothing to do with the expiring tax breaks involved in the "fiscal cliff." The first is a 3.8 percent Medicare tax on net investment income. The second is an additional 0.9 percent Medicare tax on wages and self-employment income. It's possible for a taxpayer to be subject to both taxes. This presentation explains how the new 0.9 percent Medicare tax works.

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IRS Provides Guidance on the New 0.9 Percent Medicare Tax

  1. 1. Toll Free: 877.880.4477 Phone: 281.880.6525IRS Provides Guidance on the New 0.9 Percent Medicare Tax www.hrp.net
  2. 2. The IRS recently issued much-anticipated guidance on the new 0.9 percentMedicare tax on wages and self-employment income. The new tax, whichwill only affect upper-income individuals, takes effect on January 1, 2013. www.hrp.net
  3. 3. Basics on the New TaxBefore 2013, the Medicare tax on salary and net self-employment (SE)income was a flat 2.9 percent.• If you are an employee, 1.45 percent was withheld from your paychecks, and the other 1.45 percent was paid by your employer.• If you are self-employed, you paid the whole 2.9 percent Medicare tax yourself as part of the self-employment (SE) tax.Things have changed. The healthcare legislation (passed in 2010) added anextra 0.9 percent Medicare tax on:• Salary and/or SE income above $200,000 for unmarried individuals.• Combined salary and/or net SE income above $250,000 for married joint- filing couples.• Salary and/or net SE income above $125,000 for married individuals who file separately. www.hrp.net
  4. 4. 1 Impact on Employees:1 » If you are a higher-income employee, your employer must withhold the new 0.9 percent Medicare tax from your paychecks, starting in 2013. That will result in a maximum Medicare tax wage withholding rate of 2.35 percent (1.45 percent plus 0.9 percent) for 2013 and beyond. » The maximum wage withholding rate for Social Security and Medicare taxes combined will be 8.55 percent (6.2 percent for Social Security plus 2.35 percent for Medicare) for 2013 and beyond. www.hrp.net
  5. 5. 2 Impact on Self-Employed Individuals:2 » If you are a higher-income self-employed person, you will pay the new 0.9 percent Medicare tax as part of your SE tax bill, starting in 2013. » The maximum rate for the Medicare tax component of the SE tax will be 3.8 percent (2.9 percent plus 0.9 percent) for 2013 and beyond and the maximum SE tax rate will be 16.2 percent (12.4 percent for the Social Security tax component plus 3.8 percent for the Medicare tax component) for 2013 and beyond. » Note: The extra SE tax hit from the new 0.9 percent Medicare tax will not qualify for the longstanding deduction for 50 percent of your SE tax bill. www.hrp.net
  6. 6. 3 Impact on Estimated Tax Payment Obligations:3 » If you owe the new 0.9 percent Medicare tax, you should take it into account in determining the amount of quarterly estimated tax payments that you will need to make to avoid the IRS interest charge penalty on insufficient estimated tax payments. » Note that you can potentially be affected by this issue even if all your income is from wages earned as an employee, because your employer might not withhold enough from your wages to cover the new tax. » For example, this might happen if both you and your spouse work as employees, but only one of you or neither of you has high enough wage income be subject to withholding for the new 0.9 percent tax (see Example 2 below). www.hrp.net
  7. 7. Highlights from the New IRS GuidanceThe recently issued IRS guidance on the new 0.9% Medicare tax comes inthe form of so-called proposed reliance regulations--which taxpayers canrely on even though they are only proposed rules--and 47 questions andanswers (FAQs) that have been posted on the IRS website. Here are thehighlights.Employer Withholding GuidanceThe new 0.9 percent Medicare tax only applies to employees -- notemployers. However, employers must begin withholding the new tax onceyour 2013 wage income exceeds $200,000, regardless of your tax filingstatus and regardless of your income from other sources or lack thereof. www.hrp.net
  8. 8. Example 1: George is a married joint-filer. In 2013, he earns a salary of$249,000. He has no other wage or SE income. His wife has no wage or SEincome. George and his wife dont owe the 0.9 percent Medicare tax becausethey dont have wage or SE income in excess of the $250,000 threshold forjoint-filing couples. Even so, Georges employer must withhold the 0.9 percenttax on $49,000 (the excess of Georges salary over the $200,000 withholdingthreshold). The withheld amount is $441 ($49,000 times 0.9 percent). WhenGeorge and his wife file their 2013 federal income tax return, they will receivea federal income tax withholding credit for the $441 that was withheld.There can also be situations where there is no wage withholding for anemployee who does in fact owe the 0.9 percent tax. www.hrp.net
  9. 9. Example 2: Jill is a married-joint filer. In 2013, she earns a salary of $180,000. Her husband earns $140,000. Jill and her husband have no other wage or SE income. There is no employer withholding for the 0.9 percent tax because neither Jill or her husband have wage income in excess of the $200,000 withholding threshold. Nevertheless, they owe the 0.9 percent tax on $70,000 ($180,000 plus $140,000 minus the $250,000 joint-filer threshold), which amounts to $630. When Jill and her husband file their 2013 federal income tax return, the $630 will show up as an addition to their federal income tax liability.Additional withholding for the 0.9 percent tax starts with the pay period during which an employer pays an employee wages in excess of the $200,000 withholding threshold. When a payment causes the $200,000 withholding threshold to be exceeded, the additional withholding only applies to the portion of the payment that exceeds the threshold.Example 3: In 2013, Kent receives $170,000 of salary payments through November 30, 2013. On December 1, 2013, he receives an $85,000 bonus. The last $55,000 of the bonus payment is subject to withholding for the 0.9 percent tax. Kents December salary payments are also subject to withholding for the 0.9 percent tax. www.hrp.net
  10. 10. What Kinds of Employee Compensation Are Subject to the Tax?The proposed regulations merely say the new 0.9 percent Medicare tax applies to "wages" in excess of the applicable threshold ($200,000, $250,000 or $125,000, whichever applies). However, IRS Frequently Asked Questions on the tax provide the following specifics.1 Taxable fringe benefits - Your employer must withhold for the new 0.9 1 percent tax when your total wages--including the value of any taxable  noncash fringe benefits that are treated as wages for federal employment  tax purposes--exceeds $200,000. Examples of taxable fringe benefits  include the value of personal use of a company car and company-paid club  memberships. 2 Group-term life coverage in excess of $50,000 - The imputed value of 2 group-term life insurance coverage in excess of $50,000 is subject to the  Social Security and the "regular" Medicare tax under longstanding rules.  The imputed value is also subject to withholding for the new 0.9 percent  Medicare tax to the extent the imputed value -- when combined with other  amounts treated as wages for federal employment tax purposes -- exceeds  the $200,000 withholding threshold. www.hrp.net
  11. 11. 3 Third-party sick pay - Wages paid by an employer and by the third party 3 must be aggregated to determine whether the $200,000 withholding  threshold for the new 0.9 percent tax is met. The same rules that  assign responsibility for sick pay reporting and withholding for  purposes of the "regular" Medicare tax also apply for purposes of the  new 0.9 percent tax. www.hrp.net
  12. 12. Do You Have Both Wage and Self-Employment Income?If you have both wage income subject to federal employment tax withholding and net SE income subject to the SE tax, take the following steps to determine how much, if anything, you owe for the new 0.9 percent Medicare taxStep 1: Calculate the 0.9 percent tax on any wages in excess of the applicable threshold ($200,000, $250,000 or $125,000, whichever applies to you).Step 2: Reduce the applicable threshold (but not below zero) by the total amount of your wages that are subject to the "regular" Medicare tax.Step 3: Calculate the 0.9 percent tax on your net SE income in excess of the reduced applicable threshold calculated in Step 2.The following examples illustrate how this three-step drill works. www.hrp.net
  13. 13. Example 4: Linda is unmarried. For 2013, she has $160,000 of wages subject to the "regular" Medicare tax. Because her wages are below the $200,000 withholding threshold for the 0.9 percent Medicare tax, Lindas employer does not withhold anything for the 0.9 percent tax.Linda also has net SE income of $140,000 from a very profitable side business. To calculate the 0.9 percent Medicare tax on her SE income, the $200,000 applicable threshold for unmarried individuals is reduced by Lindas $160,000 of wages, resulting in a reduced threshold of $40,000 ($200,000 minus $160,000). Therefore, Linda owes the 0.9 percent tax on $100,000 of SE income ($140,000 minus $40,000 reduced threshold), which will increase her 2013 federal income tax bill by $900.Example 5: Mark and Mary are married joint-filers. In 2013, Mark has wages subject to the "regular" Medicare tax of $190,000. Because his wages are below the $200,000 withholding threshold for the 0.9 percent Medicare tax, Marks employer does not withhold anything for it.Mary has net SE income of $210,000. To calculate the 0.9 percent Medicare tax on Marys SE income, the $250,000 applicable threshold for joint-filing couples is reduced by Marks $190,000 of wages, resulting in a reduced threshold of $60,000 ($250,000 minus $190,000). Therefore, Mark and Mary owe the 0.9 percent tax on $150,000 of SE income ($210,000 minus $60,000 reduced threshold), which will increase their 2013 federal income tax bill by $1,350. www.hrp.net
  14. 14. 14550 Torrey Chase, Suite 100 Houston, TX 77014 USA Toll Free : 877.880.4477 Phone : 281.880.6525 Fax  : 281.866.9426  E-mail   : info@hrp.net www.hrp.net

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