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MCWHMedicare Withholding (taxes)
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When Harvey James reduces his taxable income from, say, $75,000 to $72,600 by contributing $2,400 to a health FSA, he also reduces the amount subject to Social Security and Medicare withholding by $2,400.
All wages subject to the 1.45% Medicare tax, including taxable noncash fringe benefits and nonqualified deferred compensation, are subject to the 0.9% additional Medicare withholding tax and are taken into account in determining the $200,000 threshold for withholding purposes (IRS FAQs No.
The new IRC Section 3101(b)(2) provision would increase the Federal Insurance Contributions Act (FICA) Medicare withholding tax rate for single filers earning more than $200,000 and married joint filers earning more than $250,000 by 0.9 percentage points -- to 2.35 percent, from 1.45 percentage points.
That comparison is made because contributions and earnings in both accounts are exempt from federal, state, Social Security and Medicare withholding.
For the 2004 calendar year; Social Security withholding is 6.9 percent on wages up to $87,900; Medicare withholding is 1.45 percent, with no limit.
The determination of whether an individual is an employee of a governmental unit - potentially subject to Social Security and/or Medicare withholding - or an independent contractor is more problematic.
For example, the income tax component covers the AMT plus the tax law changes which began in 2013, such as the 3.8% Net Investment Income Tax (NIIT) and the excess Medicare withholding tax (0.9%).
They must limit flexible spending account contributions, increase Medicare withholding for certain employees, complete new IRS reporting forms when offering select insurance plans, and these businesses may need to change the waiting periods for employee enrollment into their benefit plans.
Further, the increased compensation will be subject to FICA and Medicare withholding. The IRS has stated that it will closely scrutinize transactions involving the personal use of airplanes; clients should be made aware of the potential for increased audit exposure.
Payments of compensation earned by the decedent and paid in the year of death (except for most plan distributions) are subject to Social Security and Medicare withholding and will be reported as Social Security and Medicare wages on the employee's final W-2, but will not be included in taxable wages on the W-2 (as those amounts are reported to the payee beneficiary on Form 1099).
Because the Medicare cap was eliminated in 1994, any amounts deferred in that year or later years should have been reported on a Form W-2 as Medicare wages, and Medicare withholding should have been taken on the whole amount.
The deferrals would still be subject to Medicare withholding and the matching contribution.