Additional Medicare Tax on Earned Income
In 2013, a new tax called the Additional Medicare Tax was enacted that applies an additional rate of 0.9% to work-related compensation earned after 2012 that exceeds certain threshold amounts based on filing status.
The tax applies to wages and other employment-related compensation, and self-employment income. Railroad Retirement Tax Act (RRTA) compensation that is subject to Medicare tax is also subject to the Additional Medicare Tax, but the threshold amounts apply to each type of compensation separately. Taxable non-cash fringe benefits are counted as compensation and are, thus, subject to the Additional Medicare Tax. There are no special rules for nonresident aliens and United States citizens living abroad.
The self-employed can deduct ½ of self-employment taxes from gross income, but the Additional Medicare Tax is not included in figuring the deduction – only the 12.4% Social Security tax plus the 2.9% Medicare tax (FICA taxes) are used in calculating the deduction.
|Single, Head of Household||$200,000|
|Married Filing Jointly,|
Qualifying Surviving Spouse with Dependent Child
|Married Filing Separately||$125,000|
Example: a single filer has $150,000 in wages and $115,000 from self-employment income. Thus, total compensation equals $265,000, which exceeds the $200,000 threshold for single filers by $65,000, incurring an Additional Medicare Tax equal to $65,000 × 0.9% = $65,000 × 0.009 = $585.
Example: one spouse of a married couple earns $200,000 in wages and the other spouse earns $150,000 in wages. Therefore, the couple has total compensation subject to the Additional Medicare Tax of $350,000, which is $100,000 more than the $250,000 threshold for joint filers, resulting in an additional tax of $100,000 × 0.009 = $900. Note that since the threshold amount for Married Filing Separately is ½ of the threshold amount for Married Filing Jointly, the additional tax would remain the same, whether the couple filed jointly or separately. Note that the Additional Medicare Tax also has a built-in marriage penalty, since if the couple was not married and filed as singles, then each would have a $200,000 threshold, in which case, neither partner would have to pay an Additional Medicare Tax on their income.
Wages subject to RRTA taxes and to FICA taxes are not combined to determine the Additional Medicare Tax liability. The threshold amounts apply separately to each category of income. Compensation subject to the Additional Medicare Tax will not also be subject to the Net Investment Income Tax, since that additional Medicare tax applies only to investment income.
Withholding Requirement for Employers
Employers must withhold the Additional Medicare Tax from wages for individuals who earn more than $200,000 in the calendar year, without regard to the individual's filing status. Unlike the regular Medicare tax, there is no employer match for the Additional Medicare Tax. An individual may owe more tax because of another job or because of self-employment compensation, in which case the individual should make estimated tax payments to cover the shortfall. An employee can also request additional withholding of income tax by filing Form W-4, Employee's Withholding Allowance Certificate, requesting additional withholding.
Employers who fail to withhold the Additional Medicare Tax will be liable for both the tax and any penalties and interest. If the employee pays the tax, then the employer has no liability for the paid tax but will still have liability for interest and penalties for not complying with the withholding, deposit, reporting, and payment responsibilities imposed by tax law. The value of taxable non-cash fringe benefits are included as compensation for which the Additional Medicare Tax must be applied when total compensation exceeds $200,000.
The employer does not have to notify the employee when it begins withholding Additional Medicare Tax and only has to start withholding the money when wages paid to the employee exceed $200,000 for the calendar year.
If employees receive third-party sick pay, then that payment must be combined with wages paid by the employer to determine the applicable Additional Medicare Tax.
If an employee receives nonqualified deferred compensation, then the Additional Medicare Tax on that compensation is calculated in the same way that the regular Medicare tax is calculated for such compensation.
If 2 companies merge or if one company acquires another company, then the successor company will include the wages paid by both previous companies in calculating the threshold amounts, in which case, The company should file Schedule D, (Form 941, Report of Discrepancies Caused by Acquisitions, Statutory Mergers, or Consolidations).
If an employee works for several subsidiaries of a corporate group, then the wages paid by each subsidiary are only combined if they are paid by a common paymaster; wages from different payers are not combined.
Wages paid to an employee by an agent under Form 2678, Employer Appointment of Agent, should not be combined with wages paid directly by the employer, by another agent on behalf of the same employer, or by the same agent on behalf of an another employer.