Medicare Surtax on Wages and Self-Employment Income
The more you earn, the more you should give...at least according to the Internal Revenue Service.
Some employees and self-employed taxpayers are required to pay an additional 0.9 percent surtax over and above the "regular" Medicare tax. The requirement is based on the amount of Medicare wages and net self-employment income a taxpayer earns that exceeds a threshold amount based on filing status.
Medicare wages are somewhat different from the wages you must pay income tax on. 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 a 401(k) can reduce wages that are subject to federal income tax, but they don't reduce wages subject to Social Security or Medicare taxes.
For self-employed individuals, Medicare wages are net earnings—income left over after business expenses are deducted on Schedule C or Schedule F—multiplied by a reducing factor.
History of the Additional Medicare Tax
The Additional Medicare Tax was legislated as part of the Patient Protection and Affordable Care Act (ACA), then it was amended by the Health Care and Education Reconciliation Act of 2010. These two laws reformed the healthcare market by requiring individuals to obtain health insurance or pay a tax penalty. The additional Medicare tax was included as a revenue raiser in that legislation.
At the time the ACA was passed, 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.
The Additional Medicare Tax on Wages
The Additional Medicare tax is a tax imposed on the employee only. Unlike the regular Medicare tax, employers are not required to match it. Medicare wages are reported on Form W-2 in box 5. The threshold amounts are:
Additional Medicare Tax Thresholds for Wage Income
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. And yes, you must pay both the regular Medicare tax and the additional tax on earnings above these thresholds. That's why they call it an "additional" tax.
Some 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 $225,000 less $200,000, or $25,000. Albert's Additional Medicare Tax is 0.9 percent of $25,000, or $225.
- 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 percent 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 what about Betty? Her wages are $200,000. She'll pay Additional Medicare Tax on the amount by which her separate wages exceed the $125,000 threshold for married taxpayers filing separately. Her excess amount is $200,000 less $125,000, which comes out to $75,000. Betty's additional Medicare tax is 0.9 percent 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. This 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 exactly the right amount of Medicare tax withheld. But the rules for the Additional Medicare Tax withholding are different from the rules for calculating the regular Medicare tax. This, too, can result in an employer withholding an amount that's different from the correct amount of tax that will ultimately be owed.
Employers are required to withhold Additional Medicare Tax on Medicare wages in excess of $200,000 paid to an employee. Compare this withholding threshold to the thresholds for the Additional Medicare Tax. There's a mismatch between the withholding threshold and the thresholds for calculating the tax for married filers.
When employees calculate their Additional Medicare Tax on their tax returns, this might or might not match up with what was withheld from their earnings. 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, then cover this tax cost. You can do this in a few ways:
- Increase your federal income tax withholding to account for the new Medicare surtax.
- Make an estimated tax payment.
- Send payment with your extension request if you file one.
- Pay the extra tax when you file your return
Additional Medicare Tax on Self-Employment Income
The threshold amounts for self-employment income are the same as for wages.
Net self-employment income is the total of all self-employment income after deductions for business expenses are taken on Schedule C, Schedule F, and Schedule K-1, which reports self-employment income from partnerships. The total self-employment income is then reduced by multiplying it by 92.35 percent. 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 a partner's self-employment income on Schedule K-1. Any deductions that show up as adjustments to income on page one of Form 1040 to reduce taxable income for federal income tax do not affect the self-employment tax and 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 reduce the income tax only.
A Taxpayer With Both Wages and Self-Employment Income
An adjustment can be made on Form 8959 line 10 if you're calculating the Additional Medicare Tax 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. The adjustment process is detailed by the IRS this way:
"Individuals with wages subject to FICA tax and self-employment income subject to SECA tax calculate their liabilities for Additional Medicare Tax in three steps:
"Step 1: Calculate 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 Additional Medicare Tax on any self-employment income in excess of the reduced threshold."
For purposes of calculating the Additional Medicare Tax, net self-employment income cannot be less than zero, so business losses can't reduce the Additional Medicare Tax owed on wage compensation.
Additional Medicare Tax on Railroad Retirement Tax Act Compensation
The Additional Medicare Tax also applies to Railroad Retirement compensation for employees and employee representatives. The 0.9 percent rate is the same, and the threshold amounts are the same as for wage earners and 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.
According to the IRS, there's one special rule for railroad income:
"Compensation subject to RRTA taxes and wages subject to FICA tax are not combined to determine Additional Medicare Tax liability. The threshold applicable to an individual’s filing status is applied separately to each of these categories of income."