What Is the Medicare Excess Tax and How Is It Calculated?
Understand the mechanics of the Additional Medicare Tax, a surtax applied to earnings above specific thresholds determined by your filing status.
The Additional Medicare Tax is a 0.9% tax levied on earnings that exceed certain income thresholds. This tax was implemented as part of the Affordable Care Act and applies on top of the standard Medicare tax. Unlike the standard Medicare tax, which has an employer-matching component, the Additional Medicare Tax is paid only by the individual taxpayer. The revenue generated from this surtax helps fund government healthcare initiatives.
Applicable Income Thresholds
The requirement to pay the Additional Medicare Tax is determined by a taxpayer’s income and their filing status. The income thresholds are fixed amounts set by the Internal Revenue Service (IRS) and do not adjust for inflation. These thresholds are:
- Single, Head of Household, or Qualifying Widow(er): $200,000
- Married Filing Jointly: $250,000
- Married Filing Separately: $125,000
If an individual’s income is above these specified levels, they are responsible for the tax on the portion of their income that surpasses the limit.
Calculating the Additional Medicare Tax
The income sources subject to this tax include Medicare wages, Railroad Retirement Tax Act (RRTA) compensation, and net earnings from self-employment. The tax rate of 0.9% is applied only to the earnings above the applicable income threshold, not on the total income.
For example, a single individual with Medicare wages of $230,000 would subtract the $200,000 threshold, leaving an excess of $30,000. The 0.9% tax is then calculated on this $30,000 excess, resulting in an Additional Medicare Tax liability of $270.
The $250,000 threshold applies to the combined earnings of married couples filing jointly. If one spouse earns $180,000 and the other earns $100,000, their joint income of $280,000 is $30,000 over the threshold. The 0.9% tax would be applied to that $30,000 excess, for a total tax of $270.
Reporting and Paying the Tax
Employers are required to begin withholding the 0.9% tax from an employee’s wages once their pay for the calendar year exceeds $200,000. This withholding occurs regardless of the employee’s filing status or other income sources.
An issue can arise for married couples when neither spouse individually earns over $200,000, but their combined income surpasses the $250,000 joint filing threshold. In this situation, their employers would not have withheld the tax, and the couple is responsible for paying the tax liability with their tax return or through estimated tax payments. Conversely, if an employer withholds the tax but the employee’s total income does not meet the threshold, the withheld amount is credited against their total tax liability on their return.
All taxpayers liable for the Additional Medicare Tax must file Form 8959, Additional Medicare Tax, with their annual income tax return. This form is used to calculate the total tax liability and to reconcile that amount with any tax that was already paid through employer withholding. Self-employed individuals who anticipate owing the tax should include the amount in their quarterly estimated tax payments to avoid potential underpayment penalties.