2013 Medicare Tax Update

Tax Professionals' Resource
January 11, 2013 — 1,171 views  
Become a Bronze Member for monthly eNewsletter, articles, and white papers.

Medicare tax is one among the two taxes which is authorized by the Federal Insurance Contribution Act (FICA). This tax pays for the government’s Medicare Hospital Insurance Program for people above the age of 65 and disabled people under the age of 65.

As of January 2011 tax update, the Medicare tax rate was 2.9% of the wages. Employers and employees each have to pay one half of the amount. Self-employed individuals have to pay the entire tax amount alone.

The IRS has released certain guidelines for employees and employers on the 2013 Medicare Tax Act. This will require taxes to be paid by those who come under the high income category; these guidelines are built upon the Affordable Care Act and the Pension Protection Act. According to the guidelines on 2013 Medicare taxes, taxation is not imposed until the employee wages exceed a certain amount.

Taxes Extended to Investments

Until now, the Medicare taxes were applicable only to wages of the employees. However, starting from January 1, 2013, the net investment income will also be taken into consideration while calculating taxes. This will include interests, dividends, rents, royalties, and gross income from a business.

Higher Tax Rates

According to the earlier Medicare tax guidelines, employers had to deduct 2.9% of the wages of the employees so as to fund Medicare. One half of the tax amount was taken from the employees and the rest of the amount was given by the employer himself. Based on the guidelines on 2013 Medicare taxes, the employee’s percent of the taxes will be increased by an extra 0.9% of the total wages. This applies to single people who are earning more than $200,000 and married couples who are earning more than $250,000.

Employer Guidelines

The 2013 Medicare tax update states that employers are responsible for withdrawing a portion of employee wages above $200,000, to be applied toward the tax. This is applicable even if a particular employee liable to pay the tax, ultimately. The employers need not notify the employees when they ultimately begin the withholding. However they can educate their employees on the revised rules, so that they can plan in advance for their income tax liabilities.

Failure to withhold the wages by the employer may result in the implementation of penalties and additions. Such employers will be responsible to the IRS for the tax amount, until the taxes are paid accordingly. The employer will also face a penalty of 20% and the IRS may also ask for reporting penalties. The additions and penalties may be valid even if IRS collects the shortfall later on from the employees.

So, employers need to work with payroll staff to facilitate the withholding procedures, before the beginning of the year. The employers should start by withholding the additional tax in the pay period when they pay the wages which exceed the threshold, and not any earlier.

Tax Strategies

To reduce the effect of the new Medicare tax update based on the Affordable Care Act, employers and employees should consider some new tax strategies. One such strategy suggests the acceleration of income to 2012, which would otherwise be included under the new tax rates from 2013. The income can also be redirected to the few types of earnings that are exempted from the taxes, like the tax-deferred retirements accounts.

Tax Professionals' Resource