Medicare Surtax on Wages and Self-Employment Income
The more you earn, the more you should give...at least according to American tax system. Some taxpayers are required to pay an additional 0.9% Medicare surtax over and above the "regular" Medicare tax. It's referred to as the Additional Medicare Tax.
The requirement is based on the amount of Medicare wages and net self-employment income a taxpayer earns that exceeds a threshold based on filing status.
History of the Additional Medicare Tax
The Additional Medicare Tax (AMT) was legislated as part of the Patient Protection and Affordable Care Act (ACA) in 2010, then it was amended by the Health Care and Education Reconciliation Act shortly thereafter. These two laws reformed the healthcare market by requiring individuals to obtain health insurance or pay a tax penalty. The AMT was included as a revenue raiser in that legislation.
The Joint Committee on Taxation estimated that the Additional Medicare Tax and the Unearned Income Medicare Contribution Tax would together generate about $210 billion in tax revenue over a 10-year period beginning in 2013, the first year that the Medicare surtax was in effect.
What Are Medicare Wages?
Medicare wages are somewhat different from the wages on which you must pay income tax. They're an employee's total wages for the year less certain benefit deductions, such as medical and dental insurance premiums, health savings accounts, and contributions to dependent care flexible spending arrangements.
Pre-tax deductions for contributions made by employees to group retirement plans such as 401(k)s can reduce wages that are subject to federal income tax, but they don't reduce wages subject to Social Security or Medicare taxes.
Medicare wages are net earnings, your income left over after business expenses are deducted on Schedule C or Schedule F for farmers multiplied by a reducing factor for self-employed individuals.
The Additional Medicare Tax on Wages
The AMT is imposed on employees only, unlike the regular Medicare tax which employers are required to match. Medicare wages are reported on Form W-2 in box 5. As of 2020, the threshold amounts aren't indexed for inflation. They are:
Medicare Wages in Excess of:
Married Filing Jointly
Single or Head of Household or Qualifying Widow(er)
Married Filing Separately
Taxpayers whose Medicare wages exceed these amounts must pay the Additional Medicare Tax on the balance over the threshold. You must pay both the regular Medicare tax and the "additional" tax on earnings above these thresholds.
Examples of Additional Medicare Tax
- Albert is single and earns $150,000 in Medicare wages at one job and $75,000 in Medicare wages at a second job. His combined wages subject to Medicare total $225,000. Albert will owe the Additional Medicare Tax on the amount by which his combined Medicare wages exceed $200,000, the threshold amount for a single person. His excess amount is $25,000, or $225,000 less $200,000. Albert's Additional Medicare Tax is therefore $225, or 0.9% of $25,000.
- Barney and Betty are married and they file a joint return. Barney earned $75,000 in Medicare wages and Betty earned $200,000 in Medicare wages, so their combined total wages are $275,000. Barney and Betty will owe the Additional Medicare Tax on the amount by which their combined wages exceed $250,000, the threshold amount for married couples filing jointly. Their excess amount is $275,000 less $250,000, or $25,000. Barney and Betty's Additional Medicare Tax is 0.9% of $25,000, or $225.
- Now suppose that Barney and Betty file separate married tax returns. The Additional Medicare Tax for separate filers is based on each spouse's separate wages. Barney earned $75,000 in wages, which is below the $125,000 threshold for a married person filing separately so he doesn't have wages in excess of the threshold amount. He doesn't have to pay any Additional Medicare Tax. But Betty's wages are $200,000. She'll pay the Additional Medicare Tax on the amount by which her separate wages exceed the $125,000 threshold for married taxpayers filing separately, or $75,000. Betty's Additional Medicare Tax is 0.9% of $75,000, which comes out to $675.
Withholding for the Additional Medicare Tax
The Additional Medicare Tax applies when a taxpayer's wages from all jobs exceed the threshold amount, and employers are required to withhold Additional Medicare Tax on Medicare wages in excess of $200,000 that they pay to an employee. The same threshold applies to everyone regardless of filing status.
This $200,000 rule can result in underpayment when a taxpayer holds two jobs, neither of which pay more than the threshold amount, so neither employer withholds for this additional tax.
Employees are accustomed to having Medicare taxes withheld from their wages by their employers, and having the right amount of Medicare tax withheld. But the rules for AMT withholding are different from the rules for calculating the regular Medicare tax. This can result in an employer withholding an amount that's different from the correct amount of tax that will ultimately be owed.
The number employees arrive at might or might not match up with what was withheld from their earnings when they calculate the AMT on their tax returns. An employee is liable for the Additional Medicare Tax even if the employer doesn't withhold it.
It's best to figure out in advance what your additional Medicare surtax will be, if possible, then cover this tax cost. You can do this in a few ways:
- Increase your federal income tax withholding to account for the Medicare surtax.
- Make one or more estimated tax payments.
- Send payment with your extension request if you file one.
- Pay the extra tax when you file your return.
The Tax on Self-Employment Income
The threshold amounts for self-employment income are the same as for wages earned by employees.
Net self-employment income is the total of all self-employment income after deductions for business expenses are taken on Schedule C, Schedule F, or Schedule E, which reports self-employment income from partnerships.
The total self-employment income is then reduced by multiplying it by 92.35%. Total net self-employment income is found on Schedule SE on either section A, line 4 or section B, line 6.
The only deductions that can reduce net self-employment income are those that go into calculating net income on Schedule C, Schedule F, or self-employment income on Schedule E.
Deductions that appear as adjustments to income on Form 1040 to reduce taxable income for federal income tax don't affect the self-employment tax or the Additional Medicare Tax. These above-the-line deductions include those for self-employed health insurance, contributions to a SEP-IRA or other self-employed retirement plan, and half the self-employment tax. These deductions only reduce your income tax.
The Tax on Combined Types of Income
An adjustment can be made on Form 8959 beginning at line 10, if you're calculating the AMT on both self-employment income and wages. This adjustment functions to ensure that the Additional Medicare Tax is calculated only once on wages and only once on self-employment income when they're combined and exceed the threshold amount.
Individuals with wages subject to the FICA tax and self-employment income subject to the self-employment tax can calculate their liabilities for Additional Medicare Tax in three steps:
- Step 1: Calculate the Additional Medicare Tax on any wages in excess of the applicable threshold for the filing status, without regard to whether any tax was withheld.
- Step 2: Reduce the applicable threshold for the filing status by the total amount of Medicare wages received, but not below zero.
- Step 3: Calculate the Additional Medicare Tax on any self-employment income in excess of the reduced threshold.
Net self-employment income can't be less than zero for purposes of calculating the Additional Medicare Tax, so business losses can't reduce the tax owed on wage compensation.
Railroad Retirement Tax Act Compensation
The Additional Medicare Tax also applies to Railroad Retirement compensation for employees and employee representatives. The 0.9% rate is the same, and the threshold amounts are the same as for wage earners and for self-employment income as well. Calculations are made in the same way the surtax is calculated on wage income.
Look for Medicare wages that are in excess of the threshold amount in box 5 of Form W-2 if you receive Railroad Retirement compensation.
There's one special rule for railroad income, according to the IRS. The threshold for an individual’s filing status applies separately to these categories of earnings. Income subject to RRTA taxes and wages subject to Medicare and Social Security aren't combined to determine Additional Medicare Tax liability.
Interaction With the Net Investment Income Tax
The Net Investment Income Tax, also referred to as the Unearned Income Medicare Contribution Tax, is another surtax that's imposed at 3.8% when investment income combined with other income surpasses the same thresholds that apply to the Additional Medicare Tax.
It's payable only as a percentage of the investment portion of income, however, so wage and self-employment income can't be subject to both taxes.
NOTE: Tax laws change periodically. You should always consult with a tax professional for the most up-to-date advice. The information contained in this article is not intended as tax advice and it is not a substitute for tax advice.