What Is the Additional Medicare Tax & Who Has to Pay It?
Unpack the Additional Medicare Tax. Grasp its core principles, identify if it applies to your income, and understand your payment responsibilities.
The Additional Medicare Tax, enacted as part of the Affordable Care Act, is a surcharge on earnings for higher-income individuals. This tax helps fund Medicare, the federal health insurance program. It applies to income types exceeding specific thresholds based on a taxpayer’s filing status.
This tax is distinct from the regular Medicare tax, which applies to all earned income. The regular Medicare tax is 1.45% for employees and 2.9% for self-employed individuals. The Additional Medicare Tax is imposed on top of these standard rates for income above the specified thresholds.
Understanding the Additional Medicare Tax
The Additional Medicare Tax is a 0.9% tax applied to Medicare wages, self-employment income, and Railroad Retirement Tax Act (RRTA) compensation that exceeds certain income thresholds. This tax contributes to the funding of Medicare, a program providing health insurance to individuals aged 65 or older, younger people with disabilities, and those with End-Stage Renal Disease.
The income thresholds for the Additional Medicare Tax vary based on a taxpayer’s filing status for the 2023 tax year. For individuals filing as Single, Head of Household, or Qualifying Widow(er), the threshold is $200,000. Married individuals filing jointly have a combined threshold of $250,000, while those married filing separately have a threshold of $125,000. The tax applies only to the amount of income that goes over these specific thresholds.
Income subject to the Additional Medicare Tax includes Medicare wages and tips, Railroad Retirement Tax Act (RRTA) compensation, and self-employment income that is subject to Medicare tax. It also applies to Net Investment Income (NII) for individuals whose modified adjusted gross income (MAGI) exceeds the applicable thresholds. Net Investment Income encompasses various income streams from investments, such as interest, dividends, capital gains from the sale of property, rental and royalty income, and income from passive activities.
The tax on Net Investment Income is a separate but related tax, and is levied at a rate of 3.8%.
Calculating the Additional Medicare Tax
For individuals, this tax applies to the lesser of the amount of earned income exceeding the threshold or the total Medicare wages, self-employment income, or Railroad Retirement Tax Act (RRTA) compensation.
Consider a single filer with $250,000 in Medicare wages. Their threshold is $200,000. The Additional Medicare Tax would apply to the $50,000 difference ($250,000 – $200,000), resulting in a tax of $450 ($50,000 0.009). If the income includes both wages and self-employment income, these amounts are combined to determine if the threshold is met. For example, a single filer with $180,000 in wages and $70,000 in self-employment income has a total of $250,000, exceeding the $200,000 threshold by $50,000. The 0.9% tax would apply to this $50,000 excess.
When an individual has both Medicare wages and self-employment income, the calculation involves a specific order of operations. The Additional Medicare Tax is first calculated on any Medicare wages exceeding the threshold for the taxpayer’s filing status. The applicable threshold is then reduced by the total amount of Medicare wages received, but not below zero. Subsequently, the Additional Medicare Tax is calculated on any self-employment income that exceeds this reduced threshold. A self-employment loss is not considered for purposes of this tax.
Paying and Reporting the Additional Medicare Tax
Employers are generally required to withhold the Additional Medicare Tax from an employee’s wages when those wages exceed $200,000 in a calendar year. This withholding obligation applies regardless of the employee’s filing status or any wages received from other employers. While employers must withhold this tax, the amount withheld might not always be sufficient to cover the total Additional Medicare Tax liability, especially if the individual has other sources of income like self-employment earnings or Net Investment Income, or if their filing status results in a higher threshold.
Individuals who anticipate owing the Additional Medicare Tax, particularly those with significant self-employment income or Net Investment Income, should consider making estimated tax payments throughout the year. This proactive approach helps avoid potential underpayment penalties that can arise if too little tax is withheld or paid. Estimated tax payments are typically made quarterly using IRS Form 1040-ES, Estimated Tax for Individuals.
Taxpayers report and calculate their Additional Medicare Tax liability on IRS Form 8959, Additional Medicare Tax. This form is then attached to their federal income tax return, such as Form 1040, U.S. Individual Income Tax Return. If a taxpayer also owes the Net Investment Income Tax, that tax is calculated and reported on IRS Form 8960, Net Investment Income Tax, which is also filed with Form 1040.