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Additional Medicare Tax

Medicare surtax of 0.9% on wages and self-employment income begins in 2013

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Employees and self-employed persons are required to pay an additional 0.9% surtax on the amount Medicare wages and net self-employment income that passes the threshold amount based on a person's filing status. Medicare wages are an employee's total wages for the year, less any benefit deductions that offset Medicare wages themselves (such as medical and dental insurance and contributions to a dependent care flexible spending arrangement).

Background       

The Additional Medicare Tax was legislated as part of the Patient Protection and Affordable Care Act, and amended by the Health Care and Education Reconciliation Act of 2010. These two laws reformed the health care market by requiring individuals to obtain health insurance or pay a tax penalty. The additional Medicare tax was included as a revenue raiser in that legislation. At the time the legislation was passed, the Joint Committee on Taxation estimated that the Additional Medicare Tax and the Unearned Income Medicare Contribution Tax would together generate an additional $20.5 billion in tax revenue in the year 2013, the first year that the Medicare surtax would be in effect. (Source: JCX-17-10 [pdf].)

 

The Additional Medicare Tax on Wages

A Medicare surtax at a rate of 0.9% applies to Medicare wages that exceeds a threshold amount for the person's filing status. The additional Medicare tax is a tax imposed on the employee only. There is no employer contribution, unlike the regular Medicare tax. Medicare wages are reported on Form W-2 box 5. The threshold amounts are:

Additional Medicare Tax Thresholds for Wage Income

Filing status

Medicare Wages in Excess of

 Married Filing Jointly

 $250,000

 Single or Head of Household or Qualifying Widow(er)

 $200,000

 Married Filing Separately

 $125,000

Source: Internal Revenue Code section 3101(b)(2)

The Additional Medicare tax applies when a taxpayer's wages from all jobs exceeds the threshold amount. For married couples filing jointly, the additional Medicare tax applies on the couple's combined wages from their jobs.

Examples:

  • Albert is single and earns $150,000 in Medicare wages at one job and $75,000 in Medicare wages at a second job. His combined wages subject to Medicare total $225,000. Albert will owe additional Medicare tax on the amount by which his combined Medicare wages exceed $200,000 (the threshold amount for a single person). His excess amount is $225,000 – $200,000 = $25,000. Albert's additional Medicare tax is 0.9% of $25,000, which is $225.
  • Barney and Betty are married and file a joint return. Barney earned $75,000 in wages, and Betty earned $200,000 in wages. Their combined wages total $275,000. Barney and Betty will owe additional Medicare tax on the amount by which their combined wages exceed $250,000 (the threshold amount for married couples filing jointly). Their excess amount is $275,000 – $250,000 = $25,000. Barney and Betty's additional Medicare tax is 0.9% of $25,000, which is $225.
  • Now suppose that Barney and Betty file separately instead. For separate filers, the additional Medicare tax is based just on that spouse's separate wages. Barney earned $75,000 in wages, which is below the $125,000 threshold for a married person filing separately. Since Barney does not have wages in excess of the threshold amount, he does not have any additional Medicare tax. What about Betty? Her wages are $200,000. She will pay additional Medicare tax on the amount by which her separate wages exceed the $125,000 threshold for married couples filing separately. Her excess amount is $200,000 – $125,000, which is $75,000. Betty's additional Medicare tax is 0.9% of $75,000, which is $675.

Medicare wages are calculated differently than wages subject to the income tax. For example, pre-tax deductions for contributions to a group retirement plan such as a 401(k) reduce wages subject to the federal income tax, but retirement contributions do not reduce wages subject to the Social Security or Medicare taxes.  Some of the more common benefits that reduce Medicare wages include health, dental and vision care insurance; dependent care assistance; and health savings accounts. (This is not a comprehensive list.)

Withholding for the Additional Medicare Tax on Wages

Employees are accustomed to having Medicare taxes withheld from their wages by their employers. We are also accustomed to having exactly the right amount of Medicare tax withheld from wages. However, the rules for the Additional Medicare Tax withholding are different than the rules for how the additional Medicare tax is calculated. In some cases the amount withheld by the employer will be different than the correct amount of tax.

Employers are required to withhold additional Medicare tax at a rate of 0.9% on Medicare wages in excess of $200,000 paid to an employee.

Compare this withholding threshold with the thresholds for the Additional Medicare tax (see above). There's a mismatch between the withholding threshold and the thresholds for calculating the tax. Employees will calculate their additional Medicare tax on their tax returns, and this may or may not match up with withholding. An employee is liable for the additional Medicare tax even if the employer doesn't withhold it specifically. For example, you may have two different jobs whose combined salaries are above your filing status threshold. In this case, you would have to figure out what your additional Medicare surtax is, and then either cover this tax cost by:

  1. Raising your federal income tax withholding to account for the new Medicare Surtax,
  2. Making an estimated tax payment,
  3. Sending payment with your extension, or
  4. By paying the extra tax when you file your return.

Also, employers are not permitted to withhold the additional Medicare tax even if the employer knows that employees are married and that their combined wages would make them subject to the additional Medicare tax.

 

The Additional Medicare Tax on Self-Employment Income

A Medicare surtax at a rate of 0.9% applies to a base of net self-employment income that exceeds a threshold amount for the person's filing status. The threshold amounts are:

Additional Medicare Tax Thresholds for Self-Employed Income

Filing status

Self-Employed Income in Excess of

 Married Filing Jointly

 $250,000

 Single or Head of Household or Qualifying Widow(er)

 $200,000

 Married Filing Separately

 $125,000

Source: Internal Revenue Code section 1401(b)(2).

Net self-employment income is the total of all self-employment income from Schedule C, Schedule F, and self-employment income from partnerships (Schedule K-1), after any business-related deductions, and after the total self-employment income has been reduced by multiplying it by 92.35%. Total net self-employment income is found on Schedule SE on either section A, line 4 or section B, line 6.

The only deductions that reduce net self-employment income are deductions that go into calculating the net income for Schedule C, Schedule F, or a partner's self-employment income on Schedule K-1. Any deductions that show up as adjustments to income on page one of Form 1040 reduce taxable income for the federal income tax, but not for the self-employment tax and the additional Medicare tax. Such deductions include the deduction for self-employed health insurance, the deduction for contributions to a SEP-IRA or other self-employed retirement plan, and the deduction for half the self-employment tax; these deductions reduce the income tax only, and do not reduce the additional Medicare tax.

The Additional Medicare Tax on self-employed income is not part of the self-employment tax (the regular Social Security and Medicare taxes on self-employed income). Since the Additional Medicare Tax is a tax imposed on the individual, and the Additional Medicare Tax is not included with the deduction for half the self-employment tax.

What if a Taxpayer has both Wages and Self-Employment Income?

The additional Medicare tax is calculated on wages and net-self-employment income over a threshold amount. On the tax form 8959, there's an adjustment made when calculating the additional Medicare tax on self-employment income if the taxpayer has wages. (See Form 8959, Line 10.) This adjustment functions to ensure that the additional Medicare tax is calculated only once on wages and self-employment income that combined are above the threshold amount. This adjustment process is detailed by the IRS as follows:

"Individuals with wages subject to FICA tax and self-employment income subject to SECA tax calculate their liabilities for Additional Medicare Tax in three steps:

"Step 1 Calculate Additional Medicare Tax on any wages in excess of the applicable threshold for the filing status, without regard to whether any tax was withheld.

"Step 2 Reduce the applicable threshold for the filing status by the total amount of Medicare wages received - but not below zero.

"Step 3 Calculate Additional Medicare Tax on any self-employment income in excess of the reduced threshold." (Q&A 19, Questions and Answers for the Additional Medicare Tax, IRS.gov)

Net self-employment income, for the purpose of calculating the additional Medicare tax, cannot be less than zero. So, any business losses will not reduce the additional Medicare tax owed on wage compensation.

The Additional Medicare Tax on Railroad Retirement Tax Act Compensation

The additional Medicare Tax applies to Railroad Retirement compensation for employees and employee representatives at a rate of 0.9% in excess of a threshold amount for the person's filing status. The threshold amounts are:

Additional Medicare Tax Thresholds for Railroad Retirement Compensation

Filing status

Railroad Retirement Compensation in Excess of

 Married Filing Jointly

 $250,000

 Single or Head of Household or Qualifying Widow(er)

 $200,000

 Married Filing Separately

 $125,000

 

The Medicare surtax on compensation subject to the Railroad Retirement Tax Act is calculated in the same way that the surtax is calculated on wage income. We are looking for Medicare wages (Form W-2 box 5) in excess of the threshold amount based on filing status. However, there's one special rule for railroad income. "Compensation subject to RRTA taxes and wages subject to FICA tax are not combined to determine Additional Medicare Tax liability. The threshold applicable to an individual’s filing status is applied separately to each of these categories of income." (Q&A 20, Questions and Answers for the Additional Medicare Tax, IRS.gov)

Forms, Instructions, and other Reference Material

The Additional Medicare Tax is calculated on Form 8959.

Instructions for Form 8959 (also available as a PDF file)

Questions and Answers for the Additional Medicare Tax (IRS.gov)

Internal Revenue Code section 3101(b)(2), the additional Medicare tax on wage income.

Internal Revenue Code section 1401(b)(2), the additional Medicare tax on self-employment income.

Internal Revenue Code sections 3201 and 3211 for the additional Medicare tax on railroad compensation.

The Treasury Department's proposed regulations: Rules Relating to Additional Medicare Tax [REG–130074–11] (also available as a pdf, 10 pages).

The Joint Committee on Taxation wrote a summary of the Additional Medicare Tax as part of its General Explanation of Tax Legislation Enacted in the 111th Congress (JCS-2-11, pdf, pages 340-343).

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