What you need to know about the Medicare surtax on wages and self-employment income
If you earn more than a certain amount, you’ll have to pay a Medicare surtax, or Additional Medicare Tax.
- The Additional Medicare Tax is separate from the regular Medicare tax and is the employee’s sole responsibility.
- It is assessed only on wages above certain thresholds.
- Employers may not withhold the full amount due, so it is a good idea to calculate the amount due for one’s self.
Medicare is the federal government’s health insurance plan for people over 65. No doubt you’re familiar with the payroll tax that funds it, but how about the Medicare surtax?
If you earn more than a certain amount, you’ll have to pay a Medicare surtax, or Additional Medicare Tax. There are some important differences between this tax and the Federal Insurance Contributions Act (FICA) tax, the payroll tax that includes both the Social Security and regular Medicare taxes.
A quick comparison is instructive. The regular Medicare tax is 1.45% and applies to both employers and employees. The Medicare tax is simply that percentage – 2.9% in total – and it applies to all wages. The Additional Medicare Tax is 0.9%, and applies only to wages above a certain threshold.
If you think you might owe Additional Medical Tax, it’s a good idea to talk to a Certified Financial Planner ©. A consultation will help you to make sure you’re assessing and paying the correct amount. And if there are any opportunities for reducing the amount due, you’ll want to make sure you take full advantage of them.
Your “Medicare wages” are the part of your wages subject to Medicare taxes. In essence, they are your wages minus certain deductions, including premiums for medical and dental insurance and health savings accounts (HSAs).
It’s important to note that Medicare wages are different from wages subject to income tax. You can use a 401(k) to reduce wages subject to federal income tax, but this will not reduce the amount of your wages subject to Medicare and Social Security tax.
On Form W-2, Medicare wages can be found on box 5.
History of the Additional Medicare Tax
The Additional Medicare Tax is one of the changes brought about with the passage of the Patient Protection and Affordable Care Act (ACA). It was also amended with the passage of the Health Care and Education Reconciliation Act of 2010.
Together, the Additional Medicare Tax and the Unearned Income Medicare Contribution Tax were projected to yield $210 billion in tax revenue over a decade, beginning in 2013. One key difference between the Additional Medicare Tax and the regular Medicare tax is that the employee alone is responsible for the Additional Medicare Tax.
The Additional Medicare Tax on wages
The Additional Medicare Tax rate is 0.9%, and it goes into effect once your income reaches a certain level. In other words, the additional Medicare surtax is only assessed on income above that level. If you’re married and filing jointly with a spouse, their income counts too.
Here are the income thresholds at which the Additional Medicare Tax starts:
|Filing status||Income threshold|
|Married filing jointly||$250,000|
|Married filing seperately||$125,000|
|Head of household (with qualifying person)||$200,000|
|Qualifying widow(er) with dependent child||$200,000|
If you’re wondering how to calculate Medicare tax, the above figures can help you out. In the event that you qualify for the Additional Medicare Tax as per the above, you can apply the rate of 0.9% to your income above that threshold.
Withholding for the Additional Medicare Tax
Employers withhold the amount for the Additional Medicare Tax, much as they do for the regular Medicare tax. However, there are a couple of important differences.
First, employers do not contribute to the Additional Medicare Tax. This means the tax is the responsibility of the employee.
Second, the rules for withholding the Additional Medicare Tax are different from the withholding rules for the regular Medicare tax. Employers withhold the Additional Medicare Tax on all Medicare wages in excess of $200,000 for every employee, regardless of filing status.
This means that when an employee calculates their Additional Medicare Tax, they may find the amount is greater than the amount of Additional Medicare Tax withheld. In particular, note that the $200,000 employer withholding threshold is different from the threshold for married couples filing jointly.
If you are an employee, it’s a good idea to figure out your Medicare surtax for 2020 regardless of what your employer does. This will help to make sure you know how much you will need to pay. You may want to increase your federal income tax withholding to take this cost into account, or make an estimated tax payment. Another option is paying the sum due when you file your return.
Additional Medicare Tax on self-employment income
If you are self-employed, the thresholds for the Additional Medicare Tax are the same as the ones for employees printed above. Note that deductions that adjust income on the first page of your 1040 do not affect both your self-employment tax and additional Medicare tax. In other words, above-the-line deductions such as self-employed health insurance do not reduce the additional Medicare tax.
Many people who have self-employed income also have a wage-earning job. If you’re one of them and you need to calculate how much Additional Medicare Tax you’ll need to pay, you can use Form 8959 to ensure you calculate the amount only once on both sources of income. This is important to make sure you don’t overpay.
Taking stock: whether you owe & how much
Whether or not you will end up owing Additional Medicare Tax will depend on your income and filing status. As we have seen here, the additional tax is only assessed above certain thresholds. Even above the thresholds, the percentage is not high, but you will still want to make sure you have calculated it correctly.
The fact that the rules for withholding are different also means it’s a good idea to calculate the amount of Additional Medicare Tax you’ll have to pay on your own. Your employer may not withhold the correct amount.
It’s also a good idea to speak with a Certified Financial Planner® to make sure you’ve calculated the amount correctly. While the 0.9% calculation sounds simple enough, in some cases there may be ways to reduce the amount owed. You’ll understand your financial situation all the better after a consultation.