Major Error Form 8959

[msmith7305]

I have found what appears to be a major error in ProSeries regarding Form 8959 Additional Medicare Tax.

When a married couple does NOT owe additional Medicare Tax because their Medicare wages are below $250,000 but they have had excess Medicare taxes withheld ProSeries does not transfer the excess to Line 18d of the Tax Payments Worksheet and, therefore, to Line 16 of Form 1040.

They are not getting credit for the total amount of taxes paid. Form 8959 is in fact not even included in the forms filed with the IRS

How I found this out was a notice sent to my client stating they had a refund due.

Facts:

W-2 Medicare Wages were $86,099

Medicare tax withheld (per W-2) were $1,929

Correct Medicare tax on $86,099 is $1,248

Client was informed by IRS that they are due a refund of $681.

When I looked at this return in ProSeries the Form 8959 DOES NOT show up under Forms In Use. So, I looked at the Form 8959. In Part I it correctly shows the $86,099 as Medicare Wages and correctly computes the Additional Medicare Tax due as $0 on line 7.

In Part V, Withholding Reconciliation, it correctly shows the $1,929 of Medicare Taxes actually withheld on Line 19.

It then correctly computes the regular Medicare Tax withholding on the $86,099 in Medicare Wages as $1,248 and puts this amount on Line 21.

Line 24 then shows the Total Additional Medicare Tax withholding of $681 that is supposed to be included with federal income tax withholding on Form 1040, Line 16.

ProSeries does NOT transfer this amount.

I have also found that this issue is exactly the same in the 2017 ProSeries software.

I will be calling Support on this issue on Monday.

I would also advise you preparers to check and see if any of your clients were impacted by this.

[Accountant-Man · Accepted solution]

The software is correct although the Employer is wrong. Luckily the IRS refunded it, but it is really the employer's problem.

[msmith7305]

Accountant Man -

I respectfully have to disagree with you.

Questions and Thoughts:

1. If ProSeries software is handling this properly, why did the 2013 and 2014 ProSeries software prepare Form 8959 and transfer the amount of over-withheld Medicare tax as an additional payment of income tax? The 8959 IS INCLUDED with the return filed and appears in the Forms In Use screen. Beginning with the 2015 program is when this stopped.

2. Why does the software diagnostic properly flag over-withheld SS tax from one employer as only recoverable from the employer but the diagnostic DOES NOT flag overwithheld Medicare tax?

3. Why would ProSeries (for a taxpayer NOT subject to the Additional Medicare Tax) make the entries on Form 8959 Part V and show the amount of over-withheld Medicare Tax on Line 24 and NOT FOLLOW that line instruction "Also include this amount with federal income tax withholding on Form 1040 line 16?

4. Just for grins I downloaded the 2018 Drake Tax software evaluation version and tested this. Drake does fill out Form 8959 and transfer the excess withheld to Form 1040 line 16.

5. The IRS website has a page entitled "Questions and Answers for the Additional Medicare Tax" (https://www.irs.gov/businesses/small-businesses-self-employed/questions-and-answers-for-the-addition...). Under who is required to file it states "If you are liable for Additional Medicare Tax and/or your employer withheld Additional Medicare Tax from your wages or compensation, you must file Form 8959". Note the OR YOUR EMPLOYER part.

6. From this same website under the question about if an employer discovers the error in a subsequent year what can the employer do, the answer states "No. If an employer withholds more than the correct amount of Additional Medicare Tax from wages paid to an employee and does not discover the error in the same year the wages were paid, the employer can not correct the error by making an interest-free adjustment. In this case, the employer should have reported the amount of Additional Medicare Tax withheld (including the over-withheld amount) on the employee’s Form W-2 for the prior year so that the employee may obtain credit for Additional Medicare Tax withheld. Additional Medicare Tax withholding will be applied against the taxes shown on the employee’s individual income tax return (Form 1040).

That is by filing Form 8959.

7. The Spring 2014 edition of the SSA/IRS Reporter discussed various scenarios of what employers can or can't do when an error has been made on over-withheld Medicare tax. The answers depended upon basically when the error was found. When the error was discovered after the calendar year of payment they stated that an employee can claim a credit for any over-withholdings of additional Medicare tax on his or her income tax return by filing Form 8959.

I believe that ProSeries began handling this issue incorrectly beginning with the 2015 software. Try out the following with the 2013 and 2014 software.

Gross/SS/MC Wages of $50,000
Use the correct FICA withheld of $3100
Use the over-withheld MC tax of $1175 vs the correct $725

Notice that the software applies the extra $450 to your tax payments.

Then, put in an excess amount of SS tax withheld. Run the diagnostic. You will be warned about the need to contact your employer for a refund but you will not get a diagnostic about the excess Medicare tax.

The final proof that ProSeries has an issue here to me was when the IRS questioned an unrelated matter on a clients tax return (which was resolved as no change) the IRS showed the overpaid Medicare tax as an additional payment of income tax and refunded it to the taxpayer. Since ProSeries did not include the Form 8959 with the tax return the IRS used the W-2 information supplied to them.  

[rbynaker]

But if Medicare Wages are only $86,099 then there would be no Additional Medicare Taxes withheld.  Additional Medicare Taxes only get withheld on wages in excess of $200,000.  Does this situation include a predecessor/successor employer?  That's the only reason I can think of that there would be Additional Medicare Taxes withheld for wages < $200K.

Prior to ACA, having too much (regular) Medicare tax withheld would be an employer problem and the employee's recourse would be to go back to the employer and request a refund.  ProSeries used to throw off a diagnostic message warning the preparer to check the medicare/social security amounts entered on the W-2 Wks.  I'm not sure if it still does.

It sounds like your problem is that the employer withheld too much regular Medicare tax, not that the employer withheld Additional Medicare Tax.  Maybe now because of the convoluted approach the IRS takes to handling Additional Medicare Taxes these concepts are interchangeable but I won't believe that until I see a client with a refund from the IRS!

In your case, did the IRS send a $681 check?  This stuff will usually get caught on the employer side if/when the quarterly 941 totals don't agree with the W-3 totals.

Rick

[msmith7305]

rbynaker -

Yes, IRS sent check. Exxon DID withhold at the 2.35% Additional Medicare Tax rate. Client questioned this and, for whatever reason, that is what they did. The clients are retired Exxon Management. Forms 941 and W-3 have nothing to do with anything as the amount of FIT, SS and MC that were withheld from my clients all do agree with what was reported on all payroll tax returns. Exxon deposited with IRS/SSA all the taxes that were withheld.

In the old days, the employee would get the overwithheld amounts from the employer. In fact, even today the employee has to go to the employer for overwithheld SS tax. But now, since the Additional Medicare Tax is due (Form 8959) any Medicare Tax withheld that is IN EXCESS of 1.45% of Medicare Wages is given to the taxpayer as additional withholding on Line 16 of the 1040. I

[msmith7305]

Here is a redacted W-2 my client received from Exxon with Medicare Tax withheld at 2.35%. Their total W-2s added up to $86,099 in Medicare Wages.

[Terry53029]

I always check the box to auto calculate when filling out the W2, and that way you will never have an issue, as you will know right away if the correct amounts were withheld.

[Accountant-Man]

I always use autocheck, too, and if I see any excess I tell the TP to get money back from employer. There wouldn't be an 8959 for my client if this happened to him.

[msmith7305]

See attached Q&A question from IRS website that shows in the event your wages are below the threshold for being subject to the tax that you need to file Form 8959 to be given credit for your payment. ProSeries incorrectly limits the filing of this form unless your total Medicare wages are $200,000 or greater. ProSeries will therefore keep you from getting the extra tax payment you are entitled to when your employer, for whatever reason, has incorrectly deducted excess Medicare tax from your wages. And, as my clients found out, ExxonMobil will NOT change anything when you go back to them 10 months after the fact.