Health care reform’s Affordable Care Act (ACA) includes a provision in which high wage earners will be subject to increased Medicare taxes once an earnings threshold has been met.
Employee wages are currently subject to a 1.45% Medicare tax rate, paid by both the employee and the employer. Effective January 1, 2013, the employee portion of Medicare tax withholding will increase from 1.45% to 2.35% once the employee has earned $200,000 in the calendar year.
Only wages earned over $200,000 in a calendar year are subject to the increased tax rate; all wages earned before the threshold is met will be taxed at 1.45%. If married filing jointly, the Medicare tax threshold amount increases to $250,000. In accordance with the IRS, this variation will be reconciled on the individual’s tax return rather than through paycheck deductions.
Example: An employee and spouse each earn $150,000 per year. Since they individually earn less than $200,000, neither will have increased Medicare taxes deducted from their paychecks. However, their combined income is $300,000, so $50,000 of those earnings will be subject to additional taxes when filing their joint tax return.
This increase affects the employee only; the employer portion will remain unchanged at 1.45% regardless of the employee’s earnings.
Nextep has already made necessary changes to comply with this law and ensure that all employees will be properly taxed. No further action is needed by Nextep clients at this time.
For additional information, please refer to the IRS guidance or contact Nextep’s Payroll Department.
