IRS issues final regs on implementation of Medicare tax

The IRS has issued final regulations relating to the additional Medicare tax imposed on income above certain threshold amounts, as added by the Patient Protection and Affordable Care Act and the Health Care and Education Reconciliation Act of 2010. The final regulations provide guidance for employers and individuals relating to the implementation of the additional Medicare tax, including the requirement to withhold additional Medicare tax on certain wages and compensation, the requirement to file a return reporting additional Medicare tax, the employer process for adjusting underpayments and overpayments of additional Medicare tax, and the employer and individual processes for filing a claim for refund for an overpayment of additional Medicare tax.

The IRS issued proposed regulations on the additional Medicare tax on December 3, 2012, and issued corrections to the proposed regulations on January 30, 2013. The final regulations generally follow the proposed regulations. In response to one comment received, the final regulations provide for adjustment by an employer of overpaid additional Medicare tax withheld from employees in the calendar year in which the wages or compensation were paid.

This tax applies to individuals' wages and compensation, as well as self-employment income, above a threshold amount received after December 31, 2012. Employers must begin withholding the tax on wages it pays an employee in excess of $200,000 in a calendar year, beginning January 1, 2013. The tax rate is 0.9 percent. The tax will be calculated and reported on the individual's tax return. All wages in excess of the applicable threshold amount subject to Medicare tax are subject to the additional Medicare tax. The same is true of Railroad Retirement Tax Act (RRTA) compensation. Threshold amounts are $250,000 (married filing jointly), $125,000 (married filing separately), and $200,000 (single, head of household, qualifying widow(er) with dependent child).

The final regulations on the tax rate and threshold amounts, with respect to both income and self-employment tax, are effective for quarters beginning on or after November 29, 2013. Taxpayers may rely on rules contained in the proposed regulations for quarters beginning prior to that date. With respect to returns to be filed by taxpayers, the regulations are effective for tax years beginning on or after November 29, 2013. With respect to adjustments to underpayments, as well as to repayment of tax erroneously collected from the employee, the regulations apply to adjusted returns filed on or after November 29, 2013. Taxpayers may rely on rules contained in the proposed regulations for adjusted returns filed before that date. The regulations apply to refund claims filed on or after November 29, 2013. (78 FR 71,468, November 29, 2013.)