IRS Issues Guidance On New Medicare Taxes

The IRS on Nov. 30 issued proposed regulations and frequently asked questions on the new Medicare taxes scheduled to take effect in 2013. The Medicare taxes were enacted as part of the 2010 health care reform legislation and comprise two parts:

a 0.9% "additional Medicare tax" on the individual share of earned income above $200,000 (single) or $250,000 (joint), and a new 3.8% tax on "net investment income" to the extent modified adjusted gross income (AGI) exceeds $200,000 (single) or $250,000 (joint). The proposed regulations on the additional Medicare tax (REG-130074-11) provide fairly straightforward guidance on employer withholding and individual reporting on tax returns. They are generally proposed to be effective when published, but may be relied upon now.

The proposed regulations on the new 3.8% tax (REG-130507) are expansive and provide guidance in many areas, but are also complex and leave some areas of uncertainty. They are proposed to be effective in 2014, but taxpayers may rely on them in 2013.

Additional Medicare tax

The regulations require employers to generally withhold an additional 0.9% Medicare tax (in addition to the current 1.45% tax on employees and employers) on any wages paid to an individual in excess of $200,000 in a calendar year, without regard to an individual's filing status or any wages from another employer. The IRS will add a line to Form 941 for employers to report this additional Medicare tax, and the existing line for regular Medicare tax on other wages will remain unchanged. Employers do not need to segregate Medicare tax deposits in the electronic federal tax payment system (EFTPS).

Individuals will calculate the additional Medicare tax on their income tax return. Those who won't satisfy their liability through normal withholding must either make estimated tax payments or request additional income tax withholding using Form W-4.

The additional Medicare tax also applies to self-employment income, and taxpayers will need to account for it in their estimated tax payments.

Tax on net investment income

The new 3.8% tax on net investment income applies to the following types of income to the extent modified AGI exceeds $200,000 (single) or $250,000 (joint):

Rents, royalties, interest and dividends unless derived in the ordinary course of a trade or business that is not a passive activity to the taxpayer and is not a trade or business of trading in financial instruments Capital gain from dispositions of...