Friday, December 20, 2013

The Additional Medicare Tax and Your Tax Return


Alert: This Additional Tax Will Surprise You at Tax Time: 

Surprise, you owe more than you expected.  It can be disturbing when expectations are not met especially when it means more money out of your pocket.  That can happen this year due to the Additional Medicare Tax.

The Additional Medicare Tax:

The Additional Medicare Tax is an additional tax or surtax on your wages, compensation or self-employment income that exceed certain thresholds.  The thresholds are:
  • $250,000 for couples filing jointly
  • $200,000 for individuals, even individuals filing Head of Household, and Qualified Widows
  • $125,000 for married persons filing separately
The tax is an additional .9% on qualified wages, compensation or self-employment income.

Employers are required to withhold the additional .9% from wages it pays to an individual in excess of $200,000 in a calendar year, without regard to the individual's filing status or wages paid by another employer.

Your Surprise:

Since employers are only required to withhold the surtax on your wages that exceed $200,000 you could wind up owing more than was withheld.  This could be the case if you had more than one source of qualified income.  It could also be the case for married couples filing jointly who are over the $250,000 threshold. 

For example, if a married couple filing jointly each make $200,000 then no additional tax would be withheld from their wages but they would owe the additional .9% tax on the amount of their income over $250,000 which would be $150,000 in their case and the additional tax would be $1,350.  Surprise!!!!

Or an individual filing a "Single" return could have income from one job of $200,000 and another $200,000 from another job or active partnership and he would owe the additional tax on $200,000 and the additional tax would be $1,800.  Surprise!!!!

What can you do?

We are too late in the game to have your employer withhold additional income taxes for you.  So there are a few options you have if you are just now aware of the surprise.  First, you could make an estimated tax payment for the fourth quarter which is due January 15th.  Second, you could prepare now to pay the additional tax when you file your tax return and send the payment on April 15th.

Sidenotes:

  • Note that wages from an S-Corporation are subject to the surtax but not Shareholder Distributions.  
  • Tips are also subject to the additional tax.
  • Non-resident aliens and U.S. citizens living abroad are subject to the Additional Medicare Tax.

This can be a complex tax matter that I would be happy to assist you with as your CPA.  I would be happy to discuss different strategies for this situation with you.

Jeff Haywood, CPA
The CPA Superhero
972-439-1955
jeff.jhtaxes@gmail.com
The above information is general information and is not all inclusive and as always in your tax situation everything "depends on facts and circumstances."  So call me to talk about your specific facts and circumstances.