On November 30, 2012, the IRS released proposed regulations and related FAQs on the Additional Hospital Insurance Tax, also known as the Additional Medicare Tax. Under the Affordable Care Act (ACA), effective January 1, 2013 employers must withhold an additional tax of 0.9% on wages in excess of $200,000 that any of their employees receive in a given calendar year. The proposed regulations provide guidance for both employers and employees on the Additional Medicare Tax, including regulations relating to:

Although the regulations are not effective until the final regulations have been published, the Additional Medicare Tax applies to all wages, compensation and self-employment income received in tax years beginning after December 31, 2012. Taxpayers may rely on the proposed regulations until the final regulations are effective. Comments on the proposed regulations are due by March 5, 2013.

The Additional Medicare Tax requires employees to pay an additional tax of 0.9% to the extent their wages exceed:

There is no employer portion corresponding to the amount payable by the employee. All wages that are currently subject to Medicare Tax (a subset of Federal Insurance Contributions Act (FICA) taxes) are also subject to the Additional Medicare Tax, including noncash fringe benefits, tips and other noncash wages. For more information on employee and employer liability for FICA taxes, see Practice Note, Payroll (FICA) Taxes.

The Additional Medicare Tax and applicable thresholds also apply to the Railroad Retirement Tax Act compensation paid to railroad employees and employee representatives and to self-employment income. The Additional Medicare Tax payable by self-employed individuals is coordinated with any wages subject to FICA, and threshold amounts of self-employment income are reduced by any wages the individual earns that are subject to FICA.

Although an employee's liability for the Additional Medicare Tax depends on his filing status as well as his compensation, an employer must withhold the Additional Medicare Tax from wages it pays to an employee in excess of $200,000 in a calendar year, regardless of the individual's filing status or wages paid by another employer. Therefore, an employee may owe more than his employer withholds or may be able to claim credit for any withheld Additional Medicare Tax against his total tax liability once he files his income tax return. Under the proposed regulations:

If an employer does not properly withhold the Additional Medicare Tax and the employee subsequently pays the tax, the IRS does not collect the tax from the employer. However, the employer remains subject to any applicable penalties or additions for failure to withhold to the extent required. Employers are not required to notify an employee when they begin withholding the Additional Medicare Tax and must begin withholding in the pay period in which they pay an employee wages in excess of $200,000 for that calendar year.

The IRS plans to release draft revised tax forms for tax year 2013 to account for the Additional Medicare Tax.