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IRS Finalizes Rules on Additional Medicare Tax

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The Internal Revenue Service has released the final regulations for the 0.9 percent Additional Medicare Tax that was imposed as part of the Affordable Care Act.

The final regulations that were released last week more or less adhere to theproposed regulations that were released last year for the Additional Hospital Insurance Tax on income above threshold amounts, usually referred to as the Additional Medicare Tax (see Tax Strategy: Proposed Guidance on Medicare Contribution Taxes). The tax took effect on January 1 of this year and applies to wages, compensation, and self-employment income above a threshold amount received in taxable years beginning after Dec. 31, 2012. The threshold amounts are $200,000 for single taxpayers and $250,000 for married filing jointly (or $125,000 for married filing separately) taxpayers.

The IRS also released final regulations last week on another tax that was included in the Affordable Care Act, the 3.8 percent Net Investment Income Tax (see IRS Releases Final Rules for Net Investment Income Tax).

The 0.9 percent Additional Medicare Tax applies to wages, railroad retirement compensation, and self-employment income over certain thresholds. Employers are responsible for withholding the tax on wages and Railroad Retirement Tax Act compensation in certain circumstances.

The only major change from the proposed regulations that were issued last December is that the proposed regulations had provided that if the employer deducts less than the correct amount of Additional Medicare Tax, it is nonetheless liable for the correct amount of tax that it was required to withhold, unless the employee pays the tax. The proposed regulations also provided that if an employee subsequently pays the tax that the employer failed to deduct, the tax would not be collected from the employer.

The final regulations, however, further say that an employer is not relieved of its liability for payment of any Additional Medicare Tax that is required to be withheld unless it can show that the tax has been paid by the employee. Employers will use Form 4669, “Statement of Payments Received,” and Form 4670, “Request for Relief from Payment of Income Tax Withholding,” the same forms used for requesting federal income tax withholding relief,  to request relief from paying Additional Medicare Tax that has already been paid by the employee.
The final regulations also amend the proposed regulations to comply with the formatting requirements of the Office of the Federal Register.

However, the IRS rejected a number of requests from various people who had commented on the proposed regulations. One commenter had expressed concern about the impact of the regulations on the small business and individual taxpayer community. The commenter disagreed with the IRS’s conclusion in the proposed regulations that no regulatory assessment or regulatory flexibility analysis were required because the rulemaking was not a significant regulatory action and would not have a significant economic impact on a substantial number of small entities.

A 1993 executive order requires agencies to prepare a regulatory assessment for “significant regulatory actions” and economically significant regulations, that is, regulatory actions that are likely to have an annual effect on the economy of $100 million or more. The commenter contended that the skills equivalent to a junior associate accountant would be needed to comply with the regulations. The commentator further argued that, assuming a junior associate reasonably bills for services at the rate of $100 per hour, and using the estimated annual reporting or recordkeeping burden for these regulations of 1.9 million hours, the estimated annual effect on the economy would $190 million.

However, The Treasury Department and the IRS said they did “not agree with the commenter’s assertion that all individuals and entities subject to the regulations will require the services of an accountant. Many employers utilize payroll service providers that are equipped to comply with these regulations and that will include Additional Medicare Tax as part of the payroll services they provide. Other employers and individuals will be able to comply with these regulations without assistance by following the instructions that accompany tax forms and by utilizing other information provided by the IRS. Therefore, neither the proposed regulations, nor these final regulations, are significant regulatory actions within the meaning of E.O. 12866, and a regulatory assessment is not required.”