Taxable Benefits Count Toward The $200,000 Line, And Payroll Has To Know Before It Is Crossed.
A 0.9 percent Additional Medicare Tax applies to wages above $200,000 in a calendar year, and wages are broader than the paycheck. This guide shows which benefits feed the total, which stay out, and how the tax is reported. General information, not legal or tax advice.
Five Questions Payroll And Benefits Teams Ask.
Each card opens a full guide. Statutes and IRS instructions change, so read the current text before you act.
How The Additional Medicare Tax Threshold And Withholding Work
The employer duty begins in the pay period when year-to-date wages pass $200,000, whatever the filing status, with no employer match.
Benefits That Count As Wages For The Additional Medicare Tax
Taxable fringes, group-term life above $50,000 and coverage outside the tax-free group can raise Medicare wages.
Benefits That Stay Out Of Medicare Wages
Qualifying cafeteria plan salary reductions and 2-percent shareholder coverage generally stay outside Medicare wages.
Imputed Income Examples And The $200,000 Threshold
Round-number examples of how small imputed amounts change when withholding starts.
Form 941, W-2 Box 6 And Fixing An Additional Medicare Tax Miss
Where the tax appears on Form 941 and Form W-2, and how to correct a miss.
How Benefits Reach The Payroll Register.
Most employers meet this tax only for a handful of highly paid people, so it is easy to leave out of benefits planning. The trouble is timing. A taxable benefit is added to wages in a pay period, and the period in which the total first passes $200,000 is the one that sets the withholding. A benefit entered late can mean the tax was owed earlier than the register shows.
Benefits and payroll usually sit with different people. Benefits staff know who has supplemental life coverage or a partner on the plan. Payroll knows the year-to-date totals. The tax works only when those two lists are compared.
We treat this as a coordination problem rather than a tax problem. Our role is to help you spot which plan features create taxable amounts, so your payroll provider or tax adviser can apply the rules.
Where Benefits Design Meets Payroll Tax.
Three plan features do most of the work. Group-term life coverage above $50,000 adds imputed income. Coverage for a person outside the tax-free group adds value to wages. Pre-tax premium deductions under a cafeteria plan take the opposite direction and reduce Medicare wages.
The Additional Medicare Tax also has no employer match and no employee opt-out, so the employer’s task is accuracy in the wage total rather than a second payment.
Setting It Up.
List the employees whose pay is within reach of $200,000 this year.
List the benefits that can add taxable value for those people.
Agree how each amount reaches payroll and how often.
Confirm that payroll applies the tax at $200,000 for every employee.
Review the Form 941 and W-2 figures at each quarter end.
Mistakes To Avoid.
Treating the tax as an issue for executives only and not checking the benefit side.
Assuming pre-tax deductions all reduce Medicare wages without confirming the plan document.
Leaving corrections until the following year, when the simple adjustment is no longer available.
Other Guides That Connect.
Group-Term Life Imputed Income Under Section 79
Imputed income on employer-paid life coverage.
Adult Children, Domestic Partners and Imputed Income
Imputed income when coverage reaches beyond the tax-free group.
Domestic Partner and Same-Sex Spouse Coverage: An Employer Guide
Eligibility and tax treatment when a partner is on the plan.
Premium-Only Plans Under Section 125
The simplest cafeteria arrangement for pre-tax premiums.
HSA, FSA and Section 125 Limits: Employer Guide
Annual limits and how they interact with Section 125.
Which Owner Health Insurance Tax Guide Fits You
How owner status changes the tax treatment of health coverage.
Laws And Sources
IRS Questions And Answers For The Additional Medicare Tax — The IRS explanation of who owes the tax, how employers withhold it, where it is reported and how to correct a miss.
26 U.S.C. 3101(b)(2), Additional Medicare Tax — Sets the 0.9 percent rate and the threshold amounts that depend on filing status.
26 U.S.C. 3102(f), Employer Withholding — Puts the withholding duty on the employer and addresses what happens when the employer fails to withhold.
26 CFR 31.3102-4, Withholding Of Additional Medicare Tax — The Treasury regulation that turns the statute into an employer withholding rule.
26 U.S.C. 3121(a), Definition Of Wages — Defines wages for Social Security and Medicare purposes and lists the payments left out, including cafeteria plan payments.
26 U.S.C. 79, Group-Term Life Insurance — Makes the cost of employer-paid coverage above $50,000 taxable to the employee.
26 U.S.C. 105(b), Medical Care Payments — Names the people whose employer-provided medical benefits can be received tax free.
26 U.S.C. 125, Cafeteria Plans — Defines a cafeteria plan and the qualified benefits it can offer.
IRS Publication 15-B, Employer’s Tax Guide To Fringe Benefits — Explains which fringe benefits are taxable and how each is treated for withholding and employment tax.
IRS Instructions For Form 941 — Walks through the quarterly employer return, including line 5d.
IRS General Instructions For Forms W-2 And W-3 — Describes the wage statement boxes, including Box 6, and the delivery deadline.
IRS Instructions For Form 8959 — Shows how an individual reconciles the tax withheld against the amount actually owed.
Quick Answers.
Short replies to the questions we hear most, each tied to a full guide.
What is the Additional Medicare Tax?
A 0.9 percent tax on wages above a threshold. Employers withhold it on wages paid to an employee above $200,000 in a calendar year, and there is no employer match.
Which benefits count as wages?
Taxable fringe benefits, group-term life cost above $50,000 and the employer-paid value of coverage for people outside the tax-free group can add to Medicare wages.
Do pre-tax health premiums count?
Generally not. Qualifying salary reductions under a section 125 cafeteria plan are left out of Social Security and Medicare wages.
Can an employee opt out of withholding?
No. Once the employer is required to withhold, it cannot honor a request to stop.
Where is the tax reported?
On line 5d of Form 941 and in Box 6 of Form W-2, which also holds regular Medicare tax withheld.
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