Saratoga Tax Lawyers – The Hospital Insurance (HI) tax rate (currently at 1.45%) would be increased by 0.9 percentage points on individual taxpayer earnings (wage withholding and SE tax) in excess of compensation thresholds for the taxpayer’s filing status; see table below.
Wage Withholding – Thus, the wage withholding HI rate would be 1.45% up to the income threshold and would be 2.35% (1.45 + 0.9) on amounts in excess of the threshold.
SE Tax – The SE tax rate would be 2.9% up to the income threshold and would be 3.8% (2.9 + 0.9) on amounts in excess of the threshold.
All Income Combined for Purposes of the Threshold
For purposes of determining the additional HI tax, all wage and self-employment income is combined. For married taxpayers, the spouses’ wages and self-employment incomes are combined.
Wages – The following details pertain to wage withholding:
o An employer must withhold the additional HI tax based upon the wages the employee receives from the employer.
o If the spouse works for the same employer, the employer may disregard the amount of wages received by the employee’s spouse when computing the withholding for either spouse.
o Where a taxpayer has multiple employment, or self-employment and/or the spouse also works, the taxpayer is responsible for the additional 0.9% tax to the extent it is not withheld by an employer and will pay the additional amount on their 1040.
o The employer will not be liable for any additional 0.9% HI tax that it fails to withhold and that the employee later pays, but will be liable for any penalties resulting from its failure to withhold.
No Additional Tax Imposed on Employers
The entire 0.9% additional HI tax is the responsibility of the individual taxpayer and the employer is not required to make a matching contribution.
Self-Employment Income – The following details pertain to payment of the additional HI SE tax:
o The self-employed taxpayer will be responsible for the additional 0.9% HI tax. And like an employer will not be liable for the matching amount.
o The SE tax computation deduction continues to be computed using half the sum of the OASDI tax rate and only the regular HI tax rate (i.e., 7.65%), without regard to the additional 0.9% HI tax.
Reporting Mechanics (Form) – Since this tax will not apply until 2013, the IRS has until late in 2013 to modify their forms to collect tax not withheld by an employer or collected as part of the SE tax. They might develop a new form or accommodate the new HI tax on either the Form 4137 or Schedule SE.
Example – Multiple Employers – Hal has two employers, one of which pays him an annual salary and bonus of $175,000 and the other pays him $75,000. Hal’s wife, Patricia, has wages of $50,000. Their combined wage total is $300,000 but no one employer paid them more than $250,000. Thus, none of their employers withheld any additional HI tax, so Hal and Patricia will be responsible for the additional $450 (0.9% of ($300,000 – $250,000)) of HI tax when they file their 1040.