Why Am I Being Charged the High-Income Medicare Tax?

Medicare taxes help fund healthcare for older Americans, but high earners may notice an additional charge on their paycheck. This extra tax, known as the Additional Medicare Tax, applies once income surpasses certain thresholds. Unlike the standard Medicare tax, which applies to all wages, this surtax only affects higher-income individuals.

Threshold Criteria

The Additional Medicare Tax applies when earnings exceed specific IRS-set thresholds. For 2024, the tax applies to income over $200,000 for individuals, $250,000 for married couples filing jointly, and $125,000 for those married but filing separately. These thresholds are not adjusted for inflation, meaning more people may become subject to the tax as wages rise.

Employers must withhold the 0.9% Additional Medicare Tax from wages exceeding $200,000 in a calendar year, regardless of filing status. This can lead to underpayment or overpayment depending on total household income. If two spouses each earn $150,000 but work for different employers, neither employer will withhold the tax, even though their combined income exceeds the $250,000 threshold. As a result, they may owe the tax when filing their return.

A single filer earning $220,000 will see the tax withheld on the $20,000 exceeding the threshold. Since the tax applies only to income above the limit, someone earning $210,000 would pay 0.9% on $10,000, resulting in an additional $90 in Medicare taxes.

Filing Status Differences

Filing status determines whether the Additional Medicare Tax applies. The IRS assesses liability based on total earnings across all sources, which can create unexpected tax obligations. Married couples filing jointly benefit from a higher threshold, but their combined income determines whether they owe. If one spouse earns $180,000 and the other $90,000, their total income exceeds $250,000, even though neither reaches the limit individually. If their employers did not withhold the tax, they may face an unexpected bill.

For couples filing separately, the threshold drops to $125,000 per person. This can be a disadvantage for those with uneven incomes. If one spouse earns $140,000 while the other makes $60,000, the higher-earning spouse will owe the tax on $15,000, despite their combined income being below the joint filing threshold.

Single filers and heads of household both have a $200,000 threshold, but heads of household may benefit from a higher standard deduction. While this does not affect Medicare tax liability, it can impact overall tax planning. Those who qualify for head of household status should compare their total tax burden to filing as single.

Wages and Self-Employment Earnings

The Additional Medicare Tax applies to more than just wages. Self-employed individuals must calculate and pay this tax on net earnings. Unlike employees, who have Medicare taxes automatically withheld, self-employed individuals must account for this tax in their estimated quarterly payments to the IRS.

For self-employed individuals, the 0.9% tax applies to earnings exceeding the threshold after deducting half of the standard 2.9% Medicare tax. This deduction accounts for the fact that self-employed individuals pay both the employer and employee portions of Medicare taxes. For example, if a sole proprietor earns $300,000 in net self-employment income, they first deduct half of the standard Medicare tax (1.45%) before applying the Additional Medicare Tax to the remaining amount above the threshold.

Certain types of income, such as rental earnings, capital gains, and dividends, are not subject to this tax, even if they push total income above the threshold. However, wages from an S corporation in which an individual is a shareholder-employee are subject to Medicare taxes, while distributions from the corporation are not. This distinction creates tax planning opportunities for those structuring their income.

Withholding Adjustments

Ensuring the correct amount is withheld for the Additional Medicare Tax can prevent unexpected liabilities, particularly for those with multiple income sources. Employers withhold based on individual earnings, not total household income, which can lead to underpayment. Adjusting Form W-4 can help by requesting additional withholding to cover any anticipated shortfall.

For employees with multiple jobs, each employer withholds Medicare taxes independently, without considering total combined earnings. This can result in no single employer withholding the Additional Medicare Tax, even if total wages exceed the threshold. To avoid underpayment, individuals can use IRS Publication 505 to estimate their tax liability and adjust their W-4 accordingly.

Self-employed individuals must calculate and remit their own Medicare taxes through estimated quarterly payments. Failing to account for the Additional Medicare Tax in these payments can result in penalties. The IRS requires estimated tax payments if total tax liability is expected to exceed $1,000 after withholding and credits. Using Form 1040-ES, self-employed individuals can determine the appropriate amounts to pay each quarter, factoring in both regular and additional Medicare taxes.

Reporting Requirements

Since employers do not always withhold the full Additional Medicare Tax, taxpayers must ensure it is properly reported on their tax return. The IRS requires individuals who owe this tax to calculate their liability on Form 8959, which is attached to Form 1040. This form reconciles withheld amounts with the total tax due, ensuring that underpayments are addressed and overpayments refunded.

For those who are self-employed or have multiple income sources, accurately reporting earnings is essential to avoid penalties. If an individual underpays throughout the year, they may face an estimated tax penalty under Internal Revenue Code Section 6654. To prevent this, taxpayers can increase withholding on their W-4 or make additional estimated payments using Form 1040-ES. The IRS provides a safe harbor rule, allowing taxpayers to avoid penalties if they pay at least 90% of their current year’s tax liability or 100% of the prior year’s total tax, whichever is lower (110% for higher-income filers).