What Is the Federal Additional Medicare Tax?
Discover the nuances of the Federal Additional Medicare Tax. Learn how this specific levy affects higher incomes and your tax planning strategy.
The Federal Additional Medicare Tax is an extra tax on certain earned income and self-employment income. This tax applies to individuals whose income exceeds specific thresholds. This supplemental tax is distinct from the standard Medicare tax, which applies to all earned income without an upper limit.
Understanding Who Pays
The Additional Medicare Tax applies based on an individual’s Modified Adjusted Gross Income (MAGI) and tax filing status. For taxpayers filing as Single, Head of Household, or Qualifying Widow(er), the tax applies if their MAGI exceeds $200,000. Married individuals filing jointly are subject to the tax if their combined MAGI surpasses $250,000. For those married filing separately, the threshold is $125,000.
The tax applies to Medicare wages (salaries, wages, and tips) and net earnings from self-employment. Net earnings from self-employment are generally gross income from their business minus allowable deductions.
Calculating the Tax
The Additional Medicare Tax is levied at a rate of 0.9%. This rate is applied to the amount of income that exceeds the applicable Modified Adjusted Gross Income (MAGI) threshold for a taxpayer’s filing status. For example, if a single filer has $220,000 in Medicare wages, the tax would apply to the $20,000 that exceeds the $200,000 threshold.
When an individual has both Medicare wages and self-employment income, these amounts are combined to determine if the total exceeds the relevant threshold. If Medicare wages alone exceed the threshold, the tax is calculated on that excess. If not, the remaining portion of the threshold is reduced by the amount of Medicare wages received, and any self-employment income exceeding this reduced threshold is then subject to the tax.
How to Report and Pay
Taxpayers determine and report their Additional Medicare Tax liability using IRS Form 8959, Additional Medicare Tax. This form helps individuals calculate the exact amount of tax owed and reconcile it with any amounts already withheld by an employer. Form 8959 is then submitted as part of the annual income tax return, typically integrated with Form 1040.
Employers are generally required to withhold the Additional Medicare Tax from an employee’s wages once those wages exceed $200,000 in a calendar year. This withholding threshold applies regardless of the employee’s filing status or any other income sources. The employer withholds the 0.9% additional tax on wages paid above this $200,000 mark.
Individuals who expect to owe the Additional Medicare Tax, especially those with significant self-employment income or other income not subject to withholding, should consider making estimated tax payments throughout the year. This proactive approach helps avoid potential penalties for underpayment of taxes. Estimated tax payments can be made using Form 1040-ES, Estimated Tax for Individuals, or through electronic options like IRS Direct Pay. These payments cover all tax liabilities, including any Additional Medicare Tax, and are credited against the total tax due on the annual return.