CLIENT UPDATE

Putney, Twombly, Hall & Hirson LLP
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November 28, 2012

Health Care Legislation Increases 2013 Medicare Taxes For Highly Compensated Employees

On October 16, 2012, the Social Security Administration announced employment tax rates for 2013. The taxable wage base limit for earnings subject to the Social Security tax for 2013 is $113,700, up from the $110,100 limit applicable in 2012.  In addition, the tax withholding rate is scheduled to return to 6.2%.  The current reduced rate of 4.2% will expire at the end of 2012, unless Congress acts to extend it.  The required withholding rate for Medicare tax is an additional 1.45% on all earnings, without limitation.

Commencing in 2013, an additional Medicare tax of 0.9% will apply to wages and self- employment income in excess of$200,000 for individuals and $250,000 for joint filers.  Under current law, the Medicare tax applies only to earned income.  In 2013, however, a new Medicare tax of 3.8% will apply to the net investment income of individuals whose adjusted gross income exceeds the above threshold amounts.  Both the 0.9% tax and the tax on investment income are part of the health care legislation that was passed in 2010.

Employers must withhold the 0.9% tax, although in many cases they will not know with certainty whether employees are subject to the tax. The 0.9% additional Medicare tax applies only to the employee and is not paid by the employer.  See IRS Questions and Answers for the Additional Medicare Tax at www.irs.gov/Businesses/Small-Businesses-&-Self-Employed/Questions-and-Answers-for-the-Additional-Medicare-Tax.

In light of the increased Medicare tax in 2013, as well as the possibility that a higher income tax rate will apply, some employers may want to consider accelerating compensation into 2012, e.g. by paying this year’s annual bonuses before year-end.

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Please do not hesitate to contact us should you have any questions concerning the new employment tax rules.