What Is the Federal Additional Medicare Tax?
Unpack the Federal Additional Medicare Tax. Discover its impact on your finances and the steps to ensure compliance with this specific obligation.
The Federal Additional Medicare Tax is an integral component of the U.S. tax system, specifically designed to help fund Medicare. Introduced as part of the Affordable Care Act (ACA), this tax applies a 0.9% levy on certain earnings that exceed specific income thresholds. It supplements the existing Medicare tax, which is typically 1.45% for employees and 2.9% for self-employed individuals. This additional tax targets higher-income earners, ensuring they contribute more to the Medicare program.
Taxpayer Eligibility and Income Thresholds
The Additional Medicare Tax applies to individuals whose Modified Adjusted Gross Income (MAGI) surpasses certain thresholds, which vary based on filing status. For the 2024 and 2025 tax years, these thresholds are $200,000 for single filers, heads of household, and qualifying widow(er)s. Married couples filing jointly face a threshold of $250,000, while married individuals filing separately have a threshold of $125,000.
This tax is imposed on individuals, not employers, though employers play a role in its collection. Modified Adjusted Gross Income (MAGI) serves as the primary determinant for eligibility.
The tax is applied to the amount of income exceeding these thresholds. For instance, a single filer earning $220,000 would pay the additional tax on the $20,000 above the $200,000 threshold. The legal basis for this tax on wages is found in Internal Revenue Code Section 3101.
Income Subject to the Tax
Once a taxpayer’s Modified Adjusted Gross Income (MAGI) exceeds the applicable thresholds, the Additional Medicare Tax applies to specific types of income. This primarily includes Medicare wages, self-employment income, and Railroad Retirement Tax Act (RRTA) compensation. The 0.9% tax is levied on the portion of these earnings that surpasses the threshold.
Medicare wages encompass various forms of compensation received for employment, such as salaries, wages, bonuses, and tips. Self-employment income refers to the net earnings derived from a trade or business carried on by an individual.
Net Investment Income (NII) is generally not subject to the 0.9% Additional Medicare Tax. However, NII is subject to a separate 3.8% Net Investment Income Tax (NIIT). While the Additional Medicare Tax focuses on earned income, the NIIT applies to investment income for taxpayers whose MAGI exceeds similar thresholds.
Calculating the Tax
The calculation of the Additional Medicare Tax involves applying a 0.9% rate to the amount of income that exceeds the established thresholds. This tax is not applied to total income, but rather only to the portion above the specific income levels for each filing status. For example, if a single filer has $220,000 in Medicare wages, the 0.9% tax would apply only to the $20,000 that exceeds the $200,000 threshold.
When an individual has both Medicare wages and self-employment income, a coordinated approach is used to determine the taxable amount. The wages are first considered against the applicable threshold. Any self-employment income is then taxed only after the threshold has been reduced by the amount of Medicare wages received, ensuring the tax is not double-counted on the same threshold amount. This means the 0.9% tax is ultimately imposed on the lesser of the amount by which the taxpayer’s Modified Adjusted Gross Income (MAGI) exceeds the applicable threshold, or the total of their Medicare wages, self-employment income, and Railroad Retirement Tax Act (RRTA) compensation that is above the threshold.
An employer is required to begin withholding the Additional Medicare Tax once an employee’s wages for the calendar year exceed $200,000, regardless of the employee’s filing status or other income. This employer withholding threshold is a fixed amount, differing from the MAGI thresholds for filing status which determine the actual tax liability. Any excess tax withheld by an employer is credited against the taxpayer’s total tax liability on their income tax return.
Reporting and Payment
Taxpayers subject to the Additional Medicare Tax are required to report it on Form 8959, titled “Additional Medicare Tax.” This form is used to calculate the amount of tax owed and any amount already withheld by an employer. The final tax liability from Form 8959 is then carried over to Form 1040, U.S. Individual Income Tax Return.
Payment of the Additional Medicare Tax can occur through two primary methods: withholding and estimated tax payments. For employees, employers are generally responsible for withholding the 0.9% Additional Medicare Tax from wages once an employee’s wages exceed $200,000 in a calendar year. This employer withholding obligation applies even if the employee’s ultimate tax liability, based on their filing status and total income, might be lower.
Self-employed individuals, or those with significant income not subject to employer withholding, are typically required to make estimated tax payments throughout the year to cover their Additional Medicare Tax liability. If an employer withholds too little, or if a taxpayer has other income sources, adjusting income tax withholding through Form W-4 or making estimated payments becomes important.