What Is the Medicare Surtax and Who Pays It?

The Additional Medicare Tax, often referred to as the Medicare Surtax, is a federal tax implemented to help fund Medicare. It applies to higher-income taxpayers, levied on income types that exceed specific thresholds. This tax aims to bolster the financial stability of Medicare, which provides health insurance coverage primarily for individuals aged 65 or older, and younger people with certain disabilities.

Understanding the Additional Medicare Tax

The Additional Medicare Tax is a distinct levy of 0.9% applied to an individual’s income that surpasses specific thresholds, operating separately from the standard Medicare tax. While the regular Medicare tax is 1.45% for employees and 2.9% for self-employed individuals, this additional tax is layered on top for higher earners. Affected employees pay a total of 2.35% (1.45% + 0.9%) on income above the threshold, and self-employed individuals pay 3.8% (2.9% + 0.9%) on their applicable earnings.

The application of this tax depends on a taxpayer’s Adjusted Gross Income (AGI) and their tax filing status. For single filers, heads of household, or qualifying widow(er)s, the tax applies to income exceeding $200,000. Married couples filing jointly face the tax when their combined income surpasses $250,000. For those married filing separately, the threshold is $125,000. These thresholds are not adjusted for inflation, meaning more taxpayers may become subject to this tax over time. The tax applies not only to individuals but also to estates and trusts that meet the specified income criteria.

Employers are generally required to withhold this additional 0.9% once an employee’s wages exceed $200,000 in a calendar year, regardless of the employee’s filing status. This simplifies the process for businesses, even if an employee’s total income does not ultimately trigger the tax liability. Any excess withholding is reconciled when the taxpayer files their annual income tax return.

Income Subject to the Additional Medicare Tax

The Additional Medicare Tax applies to specific categories of income that exceed the established thresholds. This includes wages, compensation, and self-employment income. For employees, this refers to their gross wages and any other compensation subject to Medicare taxes. For self-employed individuals, it pertains to their net earnings from self-employment.

Beyond earned income, the tax also encompasses net investment income (NII). Net investment income generally includes interest, dividends, capital gains, rental and royalty income, and passive income derived from businesses. This broad definition means that individuals with significant income from investments, even if they do not have high wages, may still be subject to the Additional Medicare Tax.

Certain types of income are specifically excluded from net investment income for the purpose of this tax. These typically include wages, self-employment income, unemployment compensation, and Social Security benefits, as these are handled under other tax provisions or are not considered investment income. Additionally, income from the active conduct of a trade or business, if the taxpayer materially participates, is generally not subject to the Net Investment Income Tax.

It is important to differentiate between the earned income and net investment income components, as both contribute to the potential tax liability but are treated distinctly in certain calculations. For instance, if an individual has both high wages and substantial investment income, both sources could contribute to the amount subject to the 0.9% tax. The tax is designed to apply to the combined income that pushes a taxpayer over the relevant AGI threshold.

Calculating the Additional Medicare Tax

Calculating the Additional Medicare Tax involves applying the 0.9% rate to the amount of income that exceeds the specific AGI threshold for a taxpayer’s filing status. This tax is not applied to the entire income, but only to the portion above the threshold. For example, a single filer with $220,000 in wages would pay the 0.9% tax on $20,000 ($220,000 – $200,000 threshold).

If a married couple filing jointly has a combined income of $280,000, they would owe the Additional Medicare Tax on $30,000 ($280,000 – $250,000 threshold). The calculation can become more intricate when both wages and self-employment income or net investment income are present. The tax is calculated on the lesser of the excess AGI over the threshold, or the total amount of wages, self-employment income, and net investment income that is subject to the tax.

For individuals with both wages and self-employment income, the calculation considers the AGI threshold first. Any wages exceeding the $200,000 employer withholding threshold will have the 0.9% tax withheld by the employer. However, the actual tax liability is determined based on the total AGI and filing status. If, for instance, a single filer has $180,000 in wages and $50,000 in net self-employment income, their total income of $230,000 exceeds the $200,000 threshold by $30,000. In this scenario, the 0.9% tax would be applied to the $30,000 excess.

When net investment income is involved, it is added to the wages and self-employment income to determine if the AGI threshold is met. The tax is then applied to the portion of the combined income that surpasses the threshold. Taxpayers should ensure accurate reporting of all income sources to correctly determine their liability for this tax.

Paying the Additional Medicare Tax

Taxpayers subject to the Additional Medicare Tax have several methods for fulfilling their payment obligations. For employees, the most common approach involves adjusting their income tax withholding. This can be done by submitting a revised Form W-4, Employee’s Withholding Certificate, to their employer. On this form, individuals can request that an additional amount of tax be withheld from each paycheck to cover their anticipated Additional Medicare Tax liability.

Employers are mandated to withhold the 0.9% Additional Medicare Tax from wages that exceed $200,000 in a calendar year, irrespective of an employee’s filing status or other income sources. This means that even if an employee’s total annual income might not ultimately trigger the tax, the employer will still withhold it once that $200,000 wage mark is crossed. Any over-withholding is then credited against the taxpayer’s total tax liability when their annual return is filed.

For individuals who earn income from self-employment or receive substantial net investment income, making estimated tax payments throughout the year is a primary method of payment. These payments are typically made quarterly using Form 1040-ES, Estimated Tax for Individuals. This proactive approach helps avoid potential underpayment penalties that can arise if a significant portion of tax liability is not paid by the due dates.

Regardless of the payment method chosen, the Additional Medicare Tax is reported on Form 8959, Additional Medicare Tax. This form is completed and filed along with the taxpayer’s annual income tax return, typically Form 1040. Form 8959 helps taxpayers reconcile the amount of Additional Medicare Tax owed with any amounts already withheld or paid through estimated taxes, ensuring accurate reporting and compliance with federal tax regulations.