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Entries in 941 Payroll-Taxes (2)

Tuesday
May162017

Form 8959 Additional Medicare Tax

Several clients have asked me this year, “What is this tax from Form 8959 on my 1040.” And I spend several minutes on the phone or writing a letter to the client explaining the form, the tax, and how it is calculated. The tax is Additional Medicare Tax authorized under the American Care Act (ObamaCare) and is assessed on all income subject to Medicare tax; wages, tips, self-employment income, basically all earned income. Passive income (interest and dividends) is not subject to this tax. Non-cash wages; i.e. fringe benefits, are subject to this tax. Example, taxpayers who receive the use of a vehicle for work and are taxed on the personal use of the vehicle (reported on their W-2). The personal use is subject to this tax if total gross income exceeds the threshold.

An individual is liable for Additional Medicare Tax when the individual’s wages, compensation, or self-employment income (together with that of his or her spouse if filing a joint return) exceed the threshold amount for the individual’s filing status:

Filing Status

Threshold

Married Filing Jointly (MFJ)

$250,000

Married Filing Separately (MFS)

  125,000

Single

  200,000

Head of Household(with qualifying person)

  200,000

Qualifying Widow(er) with dependent child

  200,000

 

There are no exceptions for resident aliens or U.S. Citizens living abroad, they are subject to the tax even if over sea’s income is excluded from income tax.

Employers must withhold the tax from wages when an individual in their employ has earned income in excess of $200,000 in a calendar year without considering the individuals filing status or wages paid by another employer. And individuals who are self-employed or are employed by two or more employers and whose wages will not exceed the threshold from anyone employer but in total will exceed the threshold; should make estimated tax payments for the Additional Medicare Tax. The threshold amount for this purpose is $200,000. However the taxpayer cannot request the employer withhold additional funds specifically for this tax. But the employee may request additional withholding for income taxes which will be available on Form 1040 to apply to the tax there.

The additional tax is included in the total Medicare tax withheld from the employee’s wages for reporting purposes and is included in the Medicare number of Box 6 on the W-2.

The tax rate is 0.9% (.009) on income in excess of the threshold so for a couple filing MFJ with gross taxable income of $300,000 the tax 0.9% of $50,000 or $450.00. An individual filing single with gross income of $300,000 the tax is $900.

Calculating the tax is a three step process:

1.)    Calculate Additional Medicare Tax on any wages in excess of the applicable threshold for the filing status, without regard to whether any tax was withheld.

2.)    Reduce the applicable threshold for the filing status by the total amount of Medicare wages received, but not below zero.

3.)    Calculate Additional Medicare Tax on any self-employment income in excess of the reduced threshold.

An example is a single filer (C), has $130,000 in wages and $145,000 in self-employment income. C’s wages are not in excess of the $200,000 threshold for single filers, so C is not liable for Additional Medicare Tax on these wages. Before calculating the Additional Medicare Tax on self-employment income, the $200,000 threshold for single filers is reduced by C’s $130,000 in wages, resulting in a reduced self-employment income threshold of $70,000. C is liable to pay Additional Medicare Tax on $75,000 of self-employment income ($145,000 in self-employment income minus the reduced threshold of $70,000).

The method is the same for other filing statuses with the threshold increasing or decreasing depending on the filing status as shown in the above table.

The additional tax withheld is included in box 6 of the W-2; Medicare tax withheld and is added to the income tax withholding amount from box 2 of the W-2 when reported on Form 1040. The tax is calculated again using total income on Form 8959. The tax amount is shown on Form 1040 under the Taxes section increasing the filer’s tax liability and the tax paid through withholding paying the tax.

I end with this is a tax intended to fund Medicare services and ObamaCare with a tax on high income filers and is a separate tax on previously taxed income; essentially double taxation of income. A rare occurrence in American taxation as it has been policy to avoid double taxation. Will this tax be rescinded under the changes proposed by the Trump administration has yet to be seen? Typically taxes once enacted stay even when the purpose they were enacted for have long since past.

Saturday
Sep222012

Penalties to the left; penalties to the right...

To the casual observer it seems there is a penalty for every infraction of IRS rules.

Yes.

There is.

The IRS wants employers and all tax payers to pay timely. And to pay using EFTPS (Electronic Federal Tax Payment System). Yes there are penalties for not making payments properly. More on making proper payments later. For amounts not deposited timely or properly the following rates apply.

2% for deposits 2-5 days late.

5% for deposits made 6-15 days late.

10% for amounts paid 16 or more days.

10% for deposits made to an unauthorized financial institution or directly to the IRS or with the return.

10% for amounts subject to electronic depositrequirements but not deposited using EFTPS.

15% for amounts unpaid 10 or more days after receiving the first notice.

 

If Tony's Tacos manager Cletus Chester failed to deposit the September 14th payroll taxes on October 15th waiting until Nov 1st would incure a penalty for Failure to Deposit (FTD). The delay is 17 days, the penalty rate is 10% so an additional $32.30 is due with the $322.95 tax deposit.

$32.30 sounds like a small penalty to pay and some employers fall to the temptation to use the federal government as a lender by not depositing payroll taxes. I have never seen this end well.

The employer loses track of what is owed, or decides "flying under the radar" is easy. How ever it starts the employer eventually receives a notice from the IRS "asking" for the missing deposits. By this time the employer may have failed to deposit several months of taxes and failed to file several quarters of payroll tax reports (Forms 941, 944, TWC form C-3) creating failure to file penalties. And at this point the costs to remedy the situation begin to climb as does my fee. Remember it is easier to do the job RIGHT (and cheaper, faster...) the first time than to go back and do it a second time.

With the FTD penalty comes a second ugly fact of missing the deposit, INTEREST! This is what makes missing the deposit painfully expensive. The interest rate is determined quarterly and is compounded daily using the sum total of unpaid tax and penalties.

Using Tony's Tacos again the interest due when the tax is paid Nov 1st the total due would be $355.75 - the PR tax of $322.95 plus the penalty of $32.30 plus the interest of $0.50. Sounds small until you consider this is for a single pay period. What if Cletus missed the deposit for the entire month of September. For the pay dates of Sept 7, Sept 14, Sept 21, Sept 28. The total tax deposit would be $1,335.69. And what if Cletus makes the payment 6 months late on March 15, 2013. And Tonly's Tacos had received notice form the IRS regarding the missing deposit dated February 5, 2013. The penalty on $1,335.69 would be at the rate of 15% or $200.35 and $19.18 interest at 3% resulting in a total due of $1,555.22 when paid March 15, 2013.

The IRS applies deposits in date made order to liabilities in due date order. They apply the oldest deposit received to the oldest past due deposit liability. This can result in a mis-match of deposits to liabilities if a deposit is missed. Even if deposits made are paid in full the mis-match will result in FTD penalties and interest for shortfall. These add up if permitted to continue or if there are large payrolls.

Failures to deposit payroll taxes result normally from either: a.) willful choice to not deposit, b.) a flaw in the payroll process that results in multiple deposits being missed or made for the wrong amounts. For situation (a) there is little that can be done until the employer chooses otherwise. Fortunetly such employers are rare. Employers in situation (b) need to review their payroll process and identify why deposits are missed or incorrect. Doing this usually results in significant savings as penalties and interest paid are eliminated and other costs once ignored are identified and controlled.