How Is Additional Medicare Tax Calculated?

The Additional Medicare Tax is a 0.9% tax applied to earned income that exceeds specific thresholds. This tax was introduced as a provision of the Affordable Care Act. It is levied on top of the standard Medicare tax that most workers already pay. Unlike the standard Medicare tax, there is no employer match for the Additional Medicare Tax. The responsibility for paying this tax falls entirely on the individual taxpayer.

Income Thresholds for the Tax

The income thresholds are tiered based on how a person files their annual tax return. For individuals who are Married Filing Jointly, the threshold is $250,000. For those who are Single or Head of Household, the threshold is set at $200,000. The threshold for a taxpayer who is Married Filing Separately is $125,000. Qualifying Widow(er)s use the same $200,000 threshold as single filers.

For married couples filing a joint return, their incomes are combined to determine if they meet the $250,000 threshold. The calculation is based on the total combined compensation, not on either spouse’s individual earnings.

Identifying Taxable Compensation

The tax applies to an individual’s Medicare wages, compensation from the Railroad Retirement Tax Act (RRTA), and net earnings from self-employment. For most people, the primary component of this calculation is their Medicare wages. This figure can be found in Box 5 of the Form W-2, Wage and Tax Statement, that an employee receives from their employer. Box 5 specifically reports the total wages and tips that are subject to Medicare tax.

For individuals who work for themselves, the relevant figure is their net earnings from self-employment. This is calculated on Schedule SE. A loss from self-employment cannot be used to reduce a taxpayer’s Medicare wages for the purposes of this tax calculation.

The Calculation and Reporting Process

The calculation and reporting of the Additional Medicare Tax are handled on Form 8959, Additional Medicare Tax. This form must be completed and filed with the taxpayer’s annual Form 1040 income tax return if they owe the tax.

The first step on Form 8959 is to enter the total Medicare wages from all sources. Next, any applicable net earnings from self-employment are added to this total. The form then requires the taxpayer to enter the specific income threshold that corresponds to their filing status.

After these figures are entered, the next step is to subtract the income threshold from the total combined compensation. This subtraction yields the amount of income that is actually subject to the tax. The final step in the calculation is to multiply this excess income amount by the tax rate of 0.9% to arrive at the total Additional Medicare Tax owed. This final tax liability figure from Form 8959 is then transferred to the appropriate line on the Form 1040, where it is added to the taxpayer’s overall tax liability for the year.

Employer Withholding and Individual Payments

Payment is managed through employer withholding and individual taxpayer actions. An employer is required to begin withholding the 0.9% tax from an employee’s pay once that employee’s wages for the calendar year exceed $200,000. This withholding is triggered based solely on the individual employee’s earnings, without regard to their filing status or other household income.

This employer-side requirement can create a common scenario of under-withholding for married couples. For instance, if each spouse earns $150,000, neither will have the tax withheld by their employer because their individual incomes are below the $200,000 trigger. However, their combined income of $300,000 is over the $250,000 threshold for joint filers, meaning they will owe the tax when they file their return.

To avoid a surprise tax bill and potential underpayment penalties, individuals can take proactive steps. One option is to submit a new Form W-4 to their employer to request that an additional amount of income tax be withheld. Another method is to make estimated tax payments directly to the IRS throughout the year using Form 1040-ES to cover the anticipated shortfall.