Additional Medicare Tax of 0.9% 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 that is subject to Medicare tax and that also exceeds a threshold amount of $200,000, or $250,000 for spouses filing jointly. The Additional Medicare Tax applies to all wages exceeding the threshold that is subject to employment or self-employment taxes. This means that many deductions, such as tax deductible retirement contributions, that lower taxable income do not lower the income subject to the Additional Medicare Tax (hereafter, Medicare wages).

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 + the 2.9% Medicare tax (FICA taxes) are used in calculating the deduction.

Income Thresholds for the Additional Medicare Tax
Filing status Threshold
Amount
Single, Head of Household $200,000
Married Filing Jointly,
Qualifying Surviving Spouse with Dependent Child
$250,000
Married Filing Separately $125,000
  • Threshold amounts are not indexed for inflation.
  • Compensation for work includes taxable fringe benefits, and all sources of such
    compensation must be combined to determine whether the threshold has been reached.

Example: Calculating the Additional Medicare Tax for a Taxpayer Filing a Single

Example: Calculating the Additional Medicare Tax for Married Couples and Partners

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.

The Additional Medicare Tax is calculated on Form 8959, Additional Medicare Tax, then reported on Form 1040, Scheduled 4.

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 must start withholding the money only 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.