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Entries in Payroll Taxes (2)

Monday
Dec312012

Additional Medicare Tax on High Income Earners

In the prior post I explained the NIIT and the proposed regulations. In this post I will explain the Additional Medicare Tax on earned income above the thresholds given in the chart below. This tax is in effect for tax years starting after December 31, 2012. The proposed regulations (REG-130074-11) are not in effect until after the notice and comment period has ended and final regulations have been published in the Federal Register.

The threshold amounts are nearly identical to the NIIT except Qualifying widower's threshold is $50,000 less for the additional Medicare tax.  This tax is simple, once the taxpayer's income exceeds the threshold for the taxpayer's filing status the additional income is taxed. So for a single who earns $200,001 the additional $1.00 above the $200,000 is taxed.

The rate of the tax is .9%. So on that $1 above the threshold the taxpayer pays an additional 9 cents.

This is an additional tax on the employee's earnings and is not matched by the employer. An interesting bit of addition of the regular Medicare tax rate for the employee and employer's matching plus the employee's additional Medicare tax rate as shown results in a familiar total rate.

 1.45% + 1.45% + .9% = 3.8%

 Shifting income from passive to active (earned) will not shield it from the additional tax.

Employers will be required to start withholding the additional .9% once the taxpayer's gross wages exceed $200,000 regardless of filing status. Employee requests to cease this withholding can not be honored by the employer.

If you have two jobs or have a pass through entity such as a partnership, LLC, or S corp and you anticipate the gross earnings to exceed your filing threshold you can instruct your employers to withhold additional amounts or make estimated tax payments. You will receive credit for the estimated tax payments against the Additional Medicare Tax.

This tax becomes a little more complicated for individuals who have both W-2 income and SE income and is best explained by giving the rules and using an example.

 

  1. Calculate Additional Medicare Tax on any wages exceeding the threshold without regard for to whether any taxes were withheld.
  2. Reduce the applicable threshold in 1 by the total Medicare Wages received but not below zero.
  3. Calculate Additional Medicare Tax on any SE income in excess of the reduced threshold.

Example: Married filers have wages and self-employed income totaling $300,000; husband's wage of $150,000 and wife's self-employed income of $150,000. Individual neither exceeds the $250,000 threshold for MFJ but combined they do. The husband's wages do not exceed the threshold so the couple is not liable for additional taxes on the wages. Next the $250,000 threshold is reduced by the husband's wages of $150,000 lowering the threshold to $100,000. The couple have SE Income subject to the Additional Medicare Tax of $50,000 (wife's SE Income of $150,000 - $100,000 reduced threshold).

 Both new taxes apply to NR Aliens and U.S. taxpayers living abroad. So plan accordingly.

 Remember to make to included this tax in your estimated tax payment calculations to avoid penalties and interest. Since this is a new tax many will forget to include in their estimates.

 

 

 

 

 

 

 

 

 

Tuesday
Sep182012

Deposit of Payroll Taxes

When do payroll taxes become a liability? What is the due date for deposit of payroll taxes?

Payroll taxes become a liability  when payroll is calculated; the pay check date (pay date) is used as the calculation date. In my example, Tony's Tacos the pay date is Sept 14, 2012. For Tony's Tacos the tax liability date is the payroll check date of Sept 14th, 2012.

The due date for payroll taxes is a tad more involved. Here I will only talk about taxes reported using Form 941 Employers Quarterly Federal Tax Return. There are two dates when withheld taxes and the employer and employee FICA taxes are to be deposited. Determination of the correct date is based on the amount of the tax deposit and the employee pay date (payroll check date). A third date is available for employers with a payroll tax liability below $2,500. It is my strong recommendation that an employer follow the monthly or semi-weekly deposit schedule.

  • Monthly: Deposit on or before the 15th of the month following the payday generating the tax liability or;
  • Semi-weekly: Deposit taxes on or before the Wednesday following a payday on Wednesday, Thursday, Friday; on or before the Friday for a payday on a Saturday, Sunday, Monday or Tuesday.
  • With the Quarterly Form 941 if the current quarter and the prior quarter total tax liability does not exceed $2,500 for either quarter. It is highly recommended this not be used and that an employer deposit payroll taxes no less than monthly!

 To determine which of the final two date to use an employer uses a look-back period that starts on July 1st of the year prior to the prior June 30. For Tony's Tacos the look back period for the current year started July 1, 2010 and ends June 30, 2011. This determination is to be made annually before the first payroll of the calendat year. If the sum total of the payroll tax deposits (Form 941 deposits) made in during that period is equal to or exceeds $50,000 the employer would be a Semi-weekly Depositor. If the sum total of the payroll tax deposits made during the Look Back period is less than $50,000 the employer would be a monthly depositor.

New employers that do not have prior payroll history or; are not a successor employer will use the Monthly Deposit schedule for the first year of payroll as they do not have a look-back period. As Tony's Tacos started operations June 1, 2012 it will be using the Monthly Deposit schedule. Tony'w will deposit the $322.95 payroll tax liability for the pay date September 14, 2012 on or before October 15, 2012.

$100,000 Next Day Deposit Rule:

If an employer accrues a $100,000 payroll tax liability on any day of the payroll period the payroll tax deposit is due and payable by the next business day. This rule applys to and replaces the monthly or semi-weekly deposit schedule for any payroll where the payroll tax liability exceeds $100,000. For example if a semi-weekly depositor employer accrued a payroll tax liability of $95,000 on Tuesday and on Wednesday accrues another $6,000 in payroll tax liability the $100,000 next day deposit rule would not apply as the $100,000 threshhold was net met by the employer on either day. The payroll tax deposit of $95,000 would be due on or before Friday following the Tueday and the $6,000 payroll tax deposit would be due on or before the following Wednesday the liabilities were created.

Continuing the example if the same semi-weekly depositor were to accrue a payroll tax liability of $100,000 on Monday then the payroll tax deposit would be due the next business day, here Tuesday. If on Tuesday an additional $30,000 in payroll taxes were accrued only the $100,000 from Monday would be deposited. The $30,000 payroll tax liability of Tuesday would follow the normal semiweekly deposit schedule and be deposited the following Friday.

 

Thursday I will cover the nasty things that can happen when an employer dailes to deposit payroll taxes or makes deposits late.