What Is the Additional Medicare Tax and Who Has to Pay It?

The Additional Medicare Tax is a component of the U.S. tax system, primarily affecting higher-income earners. Introduced as part of the Affordable Care Act in 2013, this tax aims to increase revenue for Medicare by targeting individuals with substantial earnings. Understanding its implications helps taxpayers manage their financial responsibilities and avoid penalties.

Income Threshold Criteria

The Additional Medicare Tax applies to individuals whose income exceeds specific thresholds, which vary by filing status. Single filers face a $200,000 threshold, married couples filing jointly have a $250,000 threshold, and those married but filing separately are subject to a $125,000 threshold. These thresholds are not adjusted for inflation, meaning they remain fixed and may impact more taxpayers over time as incomes grow.

The tax is calculated at a rate of 0.9% on wages, compensation, and self-employment income above these thresholds. For example, a single filer earning $250,000 would only pay the tax on the $50,000 exceeding the $200,000 threshold. This approach ensures that only income above the limits is taxed, targeting higher earners.

Self-Employed Payment Methods

Self-employed individuals must calculate and pay the Additional Medicare Tax themselves, as they do not have employers to withhold it. This requires incorporating the tax into quarterly estimated payments. The IRS offers Form 1040-ES to assist with these calculations, making accurate income projections essential to avoid underpayment penalties.

The tax is based on net earnings from self-employment, which means business expenses are deducted from gross income. Maintaining detailed income and expense records is crucial for accuracy. Tools like accounting software or consulting a tax professional can simplify this process.

Employer Withholding Details

Employers are responsible for withholding the Additional Medicare Tax on wages exceeding $200,000 in a calendar year, regardless of the employee’s filing status or other income sources. This withholding begins as soon as an employee’s wages surpass $200,000, as outlined in IRS Publication 15. However, this can sometimes result in withholding for individuals who may not owe the tax due to their combined income on a joint return. Employees can adjust their withholding using Form W-4 to account for such scenarios.

Employers report withheld taxes on Form 941, the Employer’s Quarterly Federal Tax Return. Accurate reporting is critical to avoid penalties for late or incomplete deposits. Payroll systems should be equipped to handle these requirements, as errors can result in fines and administrative challenges.

Reporting the Tax on Your Return

The Additional Medicare Tax is reported on Form 8959, which must be attached to Form 1040. This form reconciles amounts withheld by employers and reports any underpayment for self-employed individuals. It requires a breakdown of wages, Railroad Retirement Tax Act compensation, and self-employment income exceeding the threshold for your filing status. The calculated tax is then added to your total tax liability on Form 1040.

Penalties for Noncompliance

Failure to properly calculate and pay the Additional Medicare Tax can lead to penalties. For individuals, underpayment penalties accrue at 0.5% of the unpaid tax per month, up to a maximum of 25%, under IRC Section 6651(a)(2). Interest is also charged on unpaid balances from the return’s due date until the tax is fully paid, at the federal short-term rate plus 3%. Accurate reporting on Form 8959 and careful threshold calculations are essential to avoid these penalties.

Employers who fail to withhold or report the tax can face fines under IRC Section 6656, including penalties of up to 10% for late or incomplete deposits. Regular payroll audits and the use of compliant payroll software can help minimize errors and ensure adherence to IRS requirements.