In addition to the "regular" Medicare tax, some taxpayers are required to pay an additional 0.9 percent tax. The "Additional Medicare Tax" is what it's known as. The requirement is based on how much a taxpayer earns in Medicare wages and net self-employment income that exceeds a filing-status-based threshold.
The Extra Medicare Tax has a long history
In 2010, the Patient Protection and Affordable Care Act (ACA) established the Additional Medicare Tax, which was later amended by the Health Care and Education Reconciliation Act. These two laws changed the healthcare market by requiring people to purchase health insurance or face a tax penalty. That legislation included the additional tax as a revenue raiser. The Joint Committee on Taxation estimated that the Additional Medicare Tax and the Unearned Income Medicare Contribution Tax, also called as the Net Investment Income Tax (NIIT), would raise $210 billion in tax revenue over a 10-year period starting in 2013, the first year the Additional Medicare Tax was enacted.How Much Do Medicare Employees Get Paid?
The wages that you must pay income tax on are not the same as the wages that you must pay Medicare. They're an employee's total annual wages minus certain benefit deductions such as medical and dental insurance premiums, health savings accounts, and dependent care flexible spending account contributions. Pretax deductions for employee contributions to group retirement plans like 401(k)s can lower taxable wages, but they don't affect wages subject to Social Security or Medicare taxes. Note: Medicare wages are calculated by multiplying net earnings, or the money left after business expenses are deducted on Schedule C (or Schedule F for farmers), by a reducing factor for self-employed people.An additional Medicare tax is imposed on wages
Unlike the regular Medicare tax, which employers must match, the Additional Medicare Tax is imposed solely on employees. In box 5 of Form W-2, Medicare wages are reported. The following are the income thresholds: Status of the Application Wages Paid by Medicare in Excess of: Filing Jointly by Married Couples $250,000 Whether you're single, the head of your household, or a qualifying widow (er) $200,000 Separate Filing for Married Couples $125,000 If a taxpayer's Medicare wages exceed these amounts, they must pay the Additional Medicare Tax on the difference. On earnings above these thresholds, you must pay the regular Medicare tax as well as the "additional" tax.Extra Medicare Tax Examples
- Albert is a single man who works two jobs and earns $150,000 in Medicare wages at one and $75,000 at the other. He earns a total of $225,000 in Medicare-eligible wages. Albert will owe the Additional Medicare Tax if his total Medicare earnings exceed $200,000, the single-person threshold. His surplus is $25,000, or $225,000 minus $200,000, for a total of $225,000. As a result, Albert's Additional Medicare Tax is $225, or 0.9 percent of his annual salary of $25,000.
- Betty and Barney are married, so they file a joint tax return. Betty made $200,000 and Barney earned $75,000 in Medicare wages, for a total of $275,000 in Medicare wages. The amount by which Barney and Betty's combined wages exceed $250,000, the threshold amount for married couples filing jointly, will be subject to the Additional Medicare Tax. Their surplus is $275,000 less $250,000, or $25,000 in total. The Additional Medicare Tax for Barney and Betty is 0.9 percent of $25,000, or $225.
- Consider what would happen if Barney and Betty filed separate married tax returns. Separate filers pay an additional Medicare tax based on each spouse's separate earnings. Barney made $75,000 in wages, which is less than $125,000 for a married couple filing separately, so he doesn't have any earnings over the limit. He is exempt from the Additional Medicare Tax. Betty, on the other hand, earns $200,000 per year. She'd pay the Additional Medicare Tax on the portion of her earnings that surpasses the $125,000 threshold for married couple taxpayers filing separately, or $75,000, whichever is higher. Betty's Additional Medicare Tax would be 0.9 percent of her annual salary, or $675.
Withholding for the Medicare Supplementary Insurance Tax
The Additional Medicare Tax kicks in when a taxpayer's total wages from all jobs exceed the threshold amount. Employers must withhold the Additional Medicare Tax on Medicare wages paid to employees earning more than $200,000 per year. Regardless of filing status, everyone must meet the same criterion. Warning: When a taxpayer works two jobs, neither of which pays more than the threshold amount, Underpayment may occur as a result of the $200,000 rule because neither employer withholds the additional tax. Employees are used to having Medicare taxes deducted from their employers' paychecks and having the correct amount deducted. However, the rules for withholding Additional Medicare Tax differ from those for calculating regular Medicare tax. As a result, an employer may withhold an amount that is less than the correct amount of tax that will be owed in the end. When employees calculate the Additional Medicare Tax on their tax returns, the amount they get may or may not match what was withheld from their paychecks. Even if the employer does not withhold the Additional Medicare Tax, the employee is responsible for it. It's best to figure out how much your Additional Medicare Tax will be ahead of time, if possible, and then budget for it. This can be accomplished in several ways:- To account for the Additional Medicare Tax, increase your federal income tax withholding.
- Make a one-time or multiple-time estimated tax payment.
- If you file an extension request, include payment with it.
- When you file your return, pay the additional tax.
The Self-Employment Income Tax
The self-employment income threshold amounts are the same as those for employee wages. Self-employment earnings from pass-through entities such as partnerships, limited liability companies, and S corporations is reported on Schedule C, Schedule F, or Schedule E, net self-employment income is the total of all self-employment income after deductions for business expenses. After that, the total self-employment income is reduced by 92.35 percent. Schedule SE line 4a shows total net self-employment income. Note that only deductions used to calculate net self-employment income on Schedule C, Schedule F, or Schedule E can reduce net self-employment income. The self-employment tax and the Additional Medicare Tax are unaffected by deductions that show up as modifications to income on Form 1040 to reduce taxable income for federal income tax purposes. Deductions for self-employed health insurance, contributions to a SEP-IRA or other self-employed retirement plan, and half of the self-employment tax are among the above-the-line deductions. These deductions only lower your taxable income.The Combined Types of Income Tax
If you're evaluating the Additional Medicare Tax on both self-employment and wage income, you'll need to make a change on Form 8959, starting at line 10. When wages and self-employment income are combined and exceed the threshold amount, this adjustment ensures that the Additional Medicare Tax is only applied once per person. Individuals with FICA-taxed wages and self-employment income can calculate their Additional Medicare Tax liabilities in three steps: Step 1: Determine the Additional Medicare Tax on any wages in excess of the applicable filing status threshold, regardless of whether or not any tax was withheld. Step 2: Decrease the filing status threshold by the total amount of Medicare wages received, but not below zero. Step 3: Subtract the Additional Medicare Tax from any self-employment income over the reduced threshold. For reasons of calculating the Additional Medicare Tax, net self-employment income cannot be less than zero, so business losses cannot be used to offset the tax owed on wage compensation.Compensation under the Railroad Retirement Act
Employee and employee representative compensation is subject to the Additional Medicare Tax under the Railroad Retirement Tax Act. The 0.9 percent rate applies to both wage earners and self-employed individuals, as do the threshold amounts. The calculations are done in a similar manner that the tax on wage income is calculated. If you get Railroad Retirement Tax Act compensation, look for Medicare wages that are greater than the threshold amount in box 5 of Form W-2. According to the IRS, railroad income is subject to a special rule. The threshold for determining a person's filing status is set separately for these types of earnings. Additional Medicare Tax liability is calculated separately for income subject to RRTA taxes and wages subject to Medicare and Social Security.The Net Investment Income Tax and Its Interaction
When combined with other income, investment income exceeds the same thresholds as the Additional Medicare Tax; the Net Investment Income Tax, also called as the "Unearned Income Medicare Contribution Tax," is imposed at 3.8 percent. However, wage and self-employment income cannot be subject to both taxes because it is only paid as a percentage of investment income.Most Commonly Asked Questions (FAQs)
How Do You Work Out the Extra Medicare Tax?
The Additional Medicare tax is imposed by 0.9 percent of all eligible Medicare wages above the filing status threshold. If your earnings exceed the threshold, add 0.9 percent to your Medicare earnings in taxes.On Form 1040, where do you put the extra Medicare tax?
To figure out your Additional Medicare Tax, fill out IRS Form 8959. You'll use this form to reconcile any additional Medicare withholdings with what you owe, and you'll report the difference on IRS Form 1040.Do I need to pay the Medicare Tax Withholding Supplement?
If you earn more than $200,000 from a single employer, the Additional Medicare Tax will be deducted automatically. If you have additional earnings from self-employment or another job, or if you have a working spouse, it may not be enough. If your total income exceeds the following, you'll be subject to the Additional Medicare Tax. $200,000 for a single person, head of household, or qualifying widower. For a married couple filing separately, the amount is $125,000. $250,000 for a married couple filing jointly.