FAQ – Additional Medicare Tax Withholding
Question – In 2013 additional Medicare tax was withheld from employees earning more than $200K. How do I implement that? What affect does this have on my tax reporting, W2’s and 941?
Answer – In 2013 the Medicare tax rate was increased for individuals earning more than $200K. Previously all earnings were taxed at a rate of 1.45%. Now earnings up to $200K are taxed at 1.45%. Earnings over $200K are taxed at 1.45% plus an additional tax of .9% for a total of 2.345%.
If you have been current with your installations of updates then this tax rate is automatically computed. Once employees exceed the $200K threshold in earnings you will see the amount of Medicare tax withheld will increase. This may raise concern because it makes the effective tax rate something greater than 1.45% but it is normal. If you are using the MIP W2 Calculation Report you may get a warning message about this variance.
The effects on reporting this income to the government are as follows:
W2 – The total amount of Medicare tax (base plus additional) are still reported in Box 6 (Medicare Taxes) of the W2. It does not have to be broken out separately. Just be aware when you are checking your W2’s it will cause the effective tax rate to be greater than 1.45% which previously has been the same for everyone. If you have any questions about a specific employee’s Taxes you can verify them with a Tax History Report (Reports>History>Taxes).
941 – The additional Medicare tax has to be reported separately on the 941. The total of Medicare wages that are taxed at 1.45% (all wages for all employees up to $200K per individual) is reported in Box 5C and multiplied by the employer + employee rate to get the amount of Medicare withheld (2.9%).
In addition any earnings subject to the additional Medicare tax (the amount of all wages in excess of 200K per individual) are reported in Box 5D and multiplied by .9%. These amounts will also be summed into Box 5e.
These amounts are included in the regular tax totals on schedule B.
Producing the 941 in Aatrix-
The functionality to automatically report the additional Medicare in Box 5d on the 941 will be included as of v14.2. This is expected to be released in the middle of January 2014. If you need to produce a 941 before that you will need to manually type the value into Box 5D.
This is the amount of earnings in excess of $200K. It can be found from the 941 Worksheet Report (Reports>Payroll Tax Worksheets>941 Worksheet).
Why are the total taxes not including additional Medicare wages on my 941 worksheet?
My 941 worksheet does not seem to be totaling correctly. The total social security and Medicare Taxes does not include the additional Medicare Tax.
This is a defect with the 941 Worksheet report. The amount of additional Medicare wages is being calculated and collected and reported, it is not being properly added to the total on this report. This issue should be resolved in Version 14.2. This amount should tie to the amount in 5e on the 941.
I have a value in additional Medicare Wages, but I don’t have any employees who earn over $200K.
Due to the formula the report uses to calculate additional Medicare wages it can incorrectly report adjustment errors as additional Medicare wages. The report is looking for amounts that are greater than the 1.45% of subject earnings and reporting those as additional Medicare wages. If there is an adjustment or modification to the Medicare tax that results in a value greater than 1.45% of the subject earnings it will report as additional Medicare wages. The system takes this amount of tax and divides it by the additional Medicare rate to get the additional subject wages.
If you think that this is happening run a Tax History Report (Reports>History>Taxes) and filter report for Medicare Taxes.
Find document(s) and Employee(s) that have the difference.
To correct go to Activities>Setup/Adjust Employee Balances and make adjustment to correct difference on affected employees for the desired time range.
What if I did not install my update in time and the additional Medicare tax was not withheld?
You should make sure to install the latest update before running any additional payrolls.
To record the correct amount of Medicare taxes to be reported on the W2/941 you go into Setup/Adjust employee balances. You will create an adjustment and give in an appropriate date so the amounts will be recorded in the proper quarter. If some employees exceeded the $200K threshold for multiple quarters you will need to do one adjustment per quarter. On the taxes tab you will choose Medicare and then put in the correct amount of tax that should have been withheld.
This will make the employee’s W2 and the organizations 941 correct but will not withhold or transfer any money. For the correct course of action about how to get the additional amount of Medicare Tax that should have been withheld from the employee or how to report this deficiency to the government you should consult with your tax advisor.
When looking at the regulations on this additional Medicare taxes it says that the threshold for additional withholding depends on filing status.
The amount of money ultimately owed may depend on filing status but the regulations say that withholding has to be done once you have crossed the $200K threshold. Below is a link and answers to common questions.
14. If my employer withholds Additional Medicare Tax from my wages in excess of $200,000, but I won't owe the tax because my spouse and I file a joint return and we won't meet the $250,000 threshold for joint filers, can I ask my employer to stop withholding Additional Medicare Tax?
No.Your employer must withhold Additional Medicare Tax on wages it pays to you in excess of $200,000 in a calendar year. Your employer cannot honor a request to cease withholding Additional Medicare Tax if it is required to withhold it. You will claim credit for any withheld Additional Medicare Tax against the total tax liability shown on your individual income tax return (Form 1040).