The IRS recently announced the availability of updated Form 941, Employer's Quarterly Federal Tax Return for 2013, and its instructions. Revised Form 941 and its instructions reflect the January 1, 2013 effective date of the 0.9 percent Additional Medicare Tax, expiration of the payroll tax holiday and other changes. In addition to imposing new obligations on employers, the Additional Medicare Tax presents under- and over-withholding pitfalls for impacted employees.

0.9 Percent Additional Medicare Tax

The IRS reminded employers that the Additional Medicare Tax, enacted by the Patient Protection and Affordable Care Act (PPACA) applies effective January 1, 2013. The Additional Medicare Tax is imposed to the extent covered wages, compensation and/or self-employment income exceed threshold amounts ($200,000 for single individuals, $250,000 for married couples filing joint returns and $125,000 for married couples filing separately). Employers, however, must withhold Additional Medicare Tax from wages paid to an individual in excess of $200,000 in a calendar year, without regard to the individual employee's filing status or other wages/compensation.

It is up to the employee to make adjustments to account for any shortfall (if subject to the $125,000 threshold or if the combined wages of a married couple exceed $250,000) or overage (if subject to the $250,000 threshold). Employees cannot request additional withholding specifically for Additional Medicare Tax but can request a change in overall income taxes withheld by their employer. Taxpayers anticipating they will owe Additional Medicare Tax, and who did not request additional income tax withholding, may need to make estimated tax payments.

The standard Medicare tax equals 1.45 percent of covered wages. The 1.45 percent employee-share of Medicare tax is matched by the employer. There is no employer match for the Additional Medicare Tax, however.

The IRS further explained that an employer must begin withholding the 0.9 percent Additional Medicare Tax in the pay period in which they pay wages in excess of $200,000 to an employee and continue to withhold it each pay period until the end of the calendar year. All wages that are subject to Medicare tax are subject to Additional Medicare Tax withholding if paid in excess of the $200,000 withholding threshold. The IRS has added line 5d, Taxable wages & tips subject to Additional Medicare Tax withholding, to Form 941.

Payroll Tax Holiday Ends

The IRS also has reminded taxpayers that the OASDI tax rate is 6.2 percent for both employers and employees for calendar year 2013. The payroll tax holiday, effective for calendar years 2011 and 2012, was not renewed by the American Taxpayer Relief Act of 2012 (ATRA) or other legislation and has expired. The Social Security wage base for calendar year 2013 is $113,700, up from $110,100 for calendar year 2012. The payroll tax holiday had reduced the employee-share of OASDI taxes from 6.2 percent to 4.2 percent (with a comparable benefit for self-employed individuals).

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