The Internal Revenue Service (IRS) has issued final regulations governing implementation of the 0.9 percent Additional Medicare Tax (AMT) on high income earners that took effect January 1, 2013 under the Patient Protection and Affordable Care Act (PPACA). The final regulations replace earlier proposed regulations by providing additional details regarding how an employer should proceed if it has not withheld the correct amount of AMT from an employee's wages. The final regulations are applicable starting January 1, 2014.
Employer's Withholding Obligation
Under the proposed regulations, an employer must withhold AMT from an employee's wages if they exceed $200,000 in a calendar year, without taking into account the employee's filing status or other wages or compensation that may impact the employee's liability for the AMT. In addition, if an employer withholds less than the correct amount of AMT, the employer is liable for the correct amount that it should have withheld, unless and until the employee pays the tax. If the employee subsequently pays the AMT that the employer failed to withhold, the employer will not be liable for that amount.
The final regulations add that the employer will not be relieved of its liability for payment of the full AMT amount that it should have withheld unless it can show that the AMT has been paid by the employee. Employers can accomplish this by completing and filing with the Internal Revenue Service (IRS) Form 4669, Statement of Payments Received, and Form 4670, Request for Relief from Payment of Income Tax Withholding. These are the same IRS forms employers use to request relief from federal income tax withholding.
Repayment of Prior-Year Wages
The final regulations also explain how an employer should treat repayment by an employee of wage payments received in a prior year for AMT purposes (e.g., sign-on bonuses paid to employees that are subject to repayment if certain conditions are not satisfied). Specifically, an employer cannot make an adjustment or file a claim for refund of AMT withholding when there is a repayment of wages received by an employee in a prior year because the employee determines liability for the tax on his or her income tax return for the prior year. However, the employee may be able to file an amended return claiming a refund of the AMT.
Under current employment tax adjustment procedures, if the repayment occurs within the time limit for a refund, the employer can repay or reimburse the Social Security and Medicare (FICA) taxes withheld from the wage payment to the employee and file a refund claim, or make an interest-free adjustment for the overwithheld FICA tax. However, under the final regulations, an employer may adjust overpaid AMT withheld from an employee only in the calendar year in which the wages or compensation are paid, and only if the employer repays or reimburses the employee the amount of the overcollection before the end of the calendar year. In addition, an employer may claim a refund of overpaid additional AMT only if it did not deduct or withhold the overpaid tax from the employee's wages or compensation.
Accordingly, the final regulations provide that, in the case of an overpayment of AMT for a year in which an individual has filed Form 1040, US Individual Income Tax Return, a claim for refund should be made by the individual on Form 1040X, Amended US Individual Income Tax Return. Because a wage repayment reduces the wages subject to AMT for the period during which the wages were originally paid, the employee is entitled to file an amended return, on Form 1040X, to recover AMT with respect to the repaid wages.
The final regulations note that, in this situation, AMT is treated differently than federal income tax. For federal income tax purposes, wages paid in a year are considered income to the employee in that year, even when the wages are repaid by the employee to the employer in a subsequent year. If an employee repays wages to an employer in a year following the year in which the wages were originally paid, the employee cannot reduce his or her federal income tax for the prior year (i.e., the employee cannot file an amended income tax return for the prior year using Form 1040X).
Instead, depending on the circumstances, the employee may be entitled to a deduction for the repaid wages (or in some cases a reduction of tax) on his or her personal income tax return for the year of repayment.
By contrast, the AMT is part of FICA and, similar to FICA tax regulations, the repayment of wages reduces the employee's liability for AMT for the prior year.