IRS Issues Q&As on the Additional Medicare Tax under the Affordable Care Act

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Social Security and Medicare are funded in large part through payroll taxes imposed by the Federal Insurance Contributions Act or “FICA.” FICA imposes a tax of 15.3% on “wages,” which is paid by the employer and by employees, each party paying half. Before 2013, the employer portion of the tax (the so-called “hospital insurance” or “HI” portion) was 1.45% and the employee portion was also 1.45%. 1 The Patient Protection and Affordable Care Act (the “Act”) imposes an additional tax — referred to as the “Additional Hospital Insurance Tax on High- Income Taxpayers and Unearned Income” or, simply the “Additional Medicare Tax” — that increases the employee portion of the HI tax by 0.9% of wages on workers with incomes of over $200,000 for single filers and $250,000 for joint filers effective for taxable years commencing after December 31, 2012.

Employers are responsible for withholding the Additional Medicare Tax. The tax is also levied on self-employed individuals whose incomes exceed the specified thresholds. (Self employed individuals are not permitted to deduct this additional tax as a business expense.) Liability for the Additional Medicare Tax is on the employee only — there is no employer match.

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DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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