Today we're continuing to learn about the additional Medicare tax. This is a new tax, at a rate of 0.9%, on wages and self-employment income over a threshold amount.
In Part 1 of this series, we looked at the example of a single person who had two jobs. In today's example, we'll look at a married couple who both have jobs. We'll see how the additional Medicare tax is calculated and how the employer will withhold the tax. If you'd like to follow along, you may want to download the draft version of Form 8959 and the draft version of the 2013 Form 1040.
So here's the scenario.
Barney and Betty are married and they usually file a joint return. They are both work as employees and receive a W-2 form reporting their wage income. What we're going to do is look at their W-2's and then figure out how to calculate their additional Medicare tax, and then analyze their withholding situation, and see how this gets reported on the new Form 8959.
Their Form W-2 for the year 2013 look like this:
Figure 1. Part of Barney's Form W-2 for 2013:
Figure 2. Part of Betty's Form W-2 for 2013:
Let's look at Barney's and Betty's W-2 forms for a moment.
Barney earns $75,000 in total compensation at his job. His wages are subject to the federal income tax, the Social Security tax and the Medicare tax. Box 1 of Barney's W-2 shows his wages subject to the federal income tax. This is the amount we put on their Form 1040 line 7. Box 2 shows the federal income tax that was withheld by Barney's employer. Box 3 shows wages subject to the Social Security tax (up to the annual Social Security wage limit). Box 4 shows withholdings for the Social Security tax, at a flat rate of 6.2%. Box 5 shows wages subject to the Medicare tax. Box 6 shows Medicare tax withholdings -- and in Barney's case this is at a flat rate of 1.45%.
Betty's W-2 has a similar structure. Except Betty's total compensation exceeds the annual Social Security wage base, which for 2013 is $113,700.
On both of their W-2s, their box 1 wages are less than their box 5 wages. Why is this? Both Barney and Betty contributed pre-tax dollars to a traditional 401(k) retirement plan. But retirement contributions are pre-tax for the income tax only; retirement contributions are not pre-tax for Social Security or Medicare.
Now, let's figure out whether they'll be subject to the additional Medicare tax and, if so, how much that tax will be.
The first thing to point out is that the additional Medicare tax is calculated using Medicare wages. Unlike box 1 wages, which we use on the Form 1040 to calculate the federal income tax, for the new Form 8959 we'll be using Medicare wages instead.
The second thing to point out is that for married couples, the additional Medicare tax is calculated using the combined wages of both spouses.
I've been using a three-step method for analyzing the additional Medicare tax on wage income.
Step 1, add up Medicare wages from each job.
Barney earns $75,000 in Medicare wages, and Betty earns $200,000 in Medicare wages. This comes from box 5 of each of their W-2 forms. So, their combined Medicare wages is $275,000. This amount is put on line 1 of the new Form 8959.
Step 2, calculate how much (if any) total Medicare wages exceeds the relevant threshold.
The threshold amounts for the additional Medicare tax are:
|Additional Medicare Tax Thresholds|
Wages and/or Self-Employed Income in Excess of
Married Filing Jointly
Single or Head of Household or Qualifying Widow(er)
Married Filing Separately
If Barney and Betty file their tax return jointly, their threshold amount would be $250,000. Their actual Medicare wages total $275,000. Since their total Medicare wages exceed the threshold, they are subject to the additional Medicare tax. The amount by which their Medicare wages exceeds the threshold is 275,000 minus 250,000, or $25,000.
On Form 8959, we indicate the threshold amount on line 5 and the excess amount on line 6.
Step 3, calculate the tax by multiplying the excess amount from Step 2 by the tax rate of 0.9%.
Barney and Betty's Medicare wages exceeds the threshold for joint filers by $25,000. This multiplied by 0.009 is $225. So, their additional Medicare tax is $225. (This is the amount of the tax calculated on line 7 of Form 8959. We also transfer this tax amount to line 60 of the 2013 Form 1040 and check the box to indicate the tax comes from Form 8959.)
Are we done yet? Not quite. We also need to analyze Barney and Betty's withholding situation.
As I mention in part 1, employees and tax professionals have been accustomed that the Medicare tax (shown on box 6 of Form W-2) is withheld exactly. And the Medicare tax is withheld at a flat rate of 1.45% of the amount shown on Box 5 of the W-2. But now that we have the additional Medicare tax, we will need to look much more closely at the Medicare tax withholding.
To implement the additional Medicare tax, the IRS came up with a rule for employers to follow in figuring out how to withhold the additional Medicare tax. The rule goes like this. Employers are required to withhold additional Medicare tax at a rate of 0.9% based on Medicare wages if the employer pays more than $200,000 in Medicare wages to an employee.
So let's see how this rule gets applied in Barney's and Betty's situation.
Barney's Medicare wages ($75,000) are less than $200,000, so his employer will not be withholding any additional Medicare tax. Betty's Medicare wages are exactly $200,000, and since her wages are not over the withholding threshold of $200,000, her employer won't be withholding any additional Medicare tax either. We can tell that the employer did not withhold any additional Medicare tax, because box 6 of Barney's and Betty's W-2 is exactly 1.45% of the amount in Box 5. Their employer withheld only the regular Medicare tax.
However, Barney and Betty are still responsible for paying the additional Medicare tax, which we calculated to be $225. How can they pay this additional Medicare tax? They could increase the federal income tax withholding on Barney's wages or on Betty's wages, or by making an estimated tax payment, or by sending payment with their extension, or by paying the tax when they file their return. It is also possible that they will have enough federal income tax withheld (box 2 of the W-2) to cover both their income tax and their additional Medicare tax liabilities.
Now let's finish up Barney and Betty's Form 8959. We'll skip down to Part V, Withholding Reconciliation. In this section of the form, we figure out if any additional Medicare tax was withheld by the employer. We already know there wasn't any additional Medicare withholding from the analysis we did above. But let's see how this plays out in Part V of Form 8959. On Line 19 we write in their Medicare withholding from their W-2s. This is the total of the amounts shown on Box 6 of their W-2s. For Barney and Betty is amounts to $3,987.50. Line 20 repeats the total Medicare wages we had reported on Line 1, which is $275,000. On Line 21, the form asks us to multiply line 20 (total Medicare wages) by 1.45%: 275,000 times 0.0145 is 3,987.50. On Line 22, we subtract the amount on line 21 from the amount on line 19. These lines are both the same amount (3,987.50), so when we subtract them, our answer is zero. This is the amount of additional Medicare tax withheld. For Barney and Betty, this does not apply. But in other cases, people may have additional Medicare tax withholding. Line 24 of Form 8959 instructs us to take the additional Medicare withholding from wages and from railroad retirement compensation and transfer that additional Medicare withholding to Form 1040 line 62. (This is the same line where federal income tax withholding from box 2 of the W-2 shows up.) This withholding reconciliation process is going to be how the additional Medicare tax withholding gets applied to the tax return.
What if Barney and Betty decide to file separately instead? The first step is to figure out if Barney and Betty live in a community property state. If they don't, Barney will calculate his additional Medicare tax on his wages only, and Betty will calculate her additional Medicare tax on her wages only.
Barney earned $75,000 in wages, which is below the $125,000 threshold for a married person filing separately. Since Barney does not have wages in excess of the threshold amount, he does not have any additional Medicare tax. And Betty? Her wages are $200,000. Her excess amount is $200,000 - $125,000 = $75,000. Betty's additional Medicare tax is 0.9% x $75,000, which is $675.
What if Barney and Betty do live in a community property state? Well, the IRS does not address community property issues in their Questions and Answers for the Additional Medicare Tax or in their proposed regulations. So I assume for now that the normal rules for handling community property income apply. We split the couple's total wage income evenly, with Barney reporting half the total wages and Betty reporting the other half.
Together, Barney and Betty have combined Medicare wages of $275,000. Half of that is $137,500. Barney reports $137,500 of Medicare wages, minus the $125,000 threshold for separate filers is $12,500. Then multiply by 0.9% to get $112.50. This is Barney's additional Medicare tax. Betty would have the same result, since she reports half the Medicare wages too. They each pay $112.50. Their separate additional Medicare tax, when combined, adds up to the same amount they would have paid if they filed jointly ($225).
For today's example of the additional Medicare tax, I wanted to focus on the following points:
- the additional Medicare tax is calculated based on total wages from all jobs,
- in the case of married couples who decide to file jointly, the additional Medicare tax is calculated based on their combined wages,
- the additional Medicare tax is calculated based on Medicare wages, which is found on Form W-2 box 5,
- the additional Medicare tax is a rate of 0.9% on Medicare wages over the relevant threshold based on a person's filing status,
- employers are required to withhold additional Medicare tax only if the employer pays more than $200,000 in Medicare wages to an employee during the year,
- and this implies that in some cases, a person might not have additional Medicare tax withheld from his pay (for example, if each spouse has a job).
- I also wanted to get us more familiar with the new Form 8959 and how it coordinates with the W-2s and the Form 1040.
In Part 3, we'll discuss how a married couple could have additional Medicare withholding that is more than the actual amount of their tax and how they can get that withholding refunded to them.