I am cleaning out my mailbox in anticipation of the New Year so I can just start junking it up again. This sifting and sorting has its upside, however. I just paused to read the University of Missouri's 2013 Payroll Announcement memo. One entry, in particular, caught my eye:
There will be two tiers of Medicare taxes starting January 1, 2013. For wages of $200,000 and below, the Medicare tax rate will
remain at 1.45%, same as in 2012. An additional 0.9% rate of Medicare tax on wages in
excess of $200,000 was enacted as part of the Affordable
Care Act. There is no cap on the earnings subject to Medicare tax or
the additional Medicare tax.
There it is. I spy with my little eye the ACA provision that increases the Medicare tax rate by .9%. Specifically, the tax rate will increase by .9% for those with incomes over $200,000 (single) or $250,000 (filing jointly), representing an increase from 1.45% to 2.35%. It only applies to income over these threshold amounts.
You can see the IRS interpretive regulations here: http://www.irs.gov/uac/Affordable-Care-Act-Tax-Provisions. Also, here's Kelly Phillips explaining it pretty well in Forbes:
Under the current system, when you work, you pay into the Medicare system as part of your federal payroll taxes. You pay 1.45% of your pay and your employer pays in 1.45% for a total contribution of 2.9%. Unlike Social Security, there is no income cap, so all of your wages are subject to the tax; the cap on Medicare wages was removed as of January 1, 1994. Beginning in 2013, the Medicare tax imposed on high income taxpayers on the employee side will be increased by 0.9% – to 2.35% – for wages over the income thresholds (individual taxpayers reporting income over $200,000 and married taxpayers filing jointly reporting income over $250,000); amounts under the threshold will still be taxed at 1.45%. By way of example, if a single taxpayer earns $500,000, the first $200,000 is taxed at 1.45% and the next $300,000 is taxed at 2.35%. Self-employed taxpayers will have the same limitations.
This is a good explanation because it assumes no pre-existing knowledge of the status quo on the Medicare tax and Medicare funding. Second only to questions interpreting health insurance policies and decisions, I am asked questions about understanding health care financing — particularly in relationship to payroll deduction. Across the educational and income spectrum, those who ask know suprisingly little about their own payroll taxes.
There it is. We have to acknowledge, via an increase, that current workers contribute to Medicare funding. That is what FICA is and, though these funds are allocated to a Medicare-only trust fund, they are also supplemented by your income taxes to pay for Medicare and — ultimately — supplemented by various premiums and co-pays when you become a Medicare benificiary.
If you are still with me this late on Christmas Eve, you are what I would call a motivated student.
Here's the question for advanced students: If the ACA raises the Medicare tax, why does it do so unevenly or only on the employee side of the equation? Do we see a bit more of an effort to means test Medicare here, by targeting this increased Medicare tax to higher wage earners alone?
And for extra credit: Where else do we see advanced the means-testing of Medicare?
Joyous Holidays to All!
1 thought on “ACA Implementation: University of Missouri Payroll Announcements”
Where that will get interesting is the two-income $125-150K each population, which will owe the tax collectively, but would not individually. Right now, spouses making roughly the same amount should, as a rule, file jointly*; this will create areas where it is to their advantage to file separately.
That also answers why the surtax is only on the employee side of the equation: the accounting is impossible at the corporate level, probably even if both spice work together. (Say you make $199K; Brad, who was on sabbatical for half the year, makes $95K–Medicare tax is owed on $44K, but by whom?? Only the couple (and their accountant) can do the aggregation.
I think it’s more an effort not to means-test Medicare. It reduces “return” for those who can afford it most, but keeps benefits constant while shoring up the system some. Or, more accurately, it’s effect is to delay means-testing as long as possible.
*Obviously, it’s not even close if the incomes are disparate and you effectively “lower the bracket” of one income by doing so. But the margin shifts, as it may well do in the example above.