On November 26, 2013, the IRS issued final regulations (TD 9645 PDF ) implementing the Additional Medicare Tax as added by the Affordable Care Act (ACA). The Additional Medicare Tax applies to wages, railroad retirement (RRTA) compensation, and self-employment income over certain thresholds. Employers are responsible for withholding the tax on wages and RRTA compensation in certain circumstances.
Additional Medicare Tax went into effect in 2013 and applies to wages, compensation, and self-employment income above a threshold amount received in taxable years beginning after December 31, 2012.
The rate is 0.9 percent.
An individual is liable for Additional Medicare Tax if the individual’s wages, compensation, or self-employment income (together with that of his or her spouse if filing a joint return) exceed the threshold amount for the individual’s filing status:
All wages that are currently subject to Medicare Tax are subject to Additional Medicare Tax if they are paid in excess of the applicable threshold for an individual’s filing status. For more information on what wages are subject to Medicare Tax, see the chart, Special Rules for Various Types of Services and Payments, in section 15 of Publication 15, (Circular E), Employer’s Tax Guide.
All RRTA compensation that is currently subject to Medicare Tax is subject to Additional Medicare Tax if it is paid in excess of the applicable threshold for an individual’s filing status. All FAQs that discuss the application of the Additional Medicare Tax to wages also apply to RRTA compensation, unless otherwise indicated.
There are no special rules for nonresident aliens and U.S. citizens living abroad for purposes of this provision. Wages, other compensation, and self-employment income that are subject to Medicare tax will also be subject to Additional Medicare Tax if in excess of the applicable threshold.
No. The tax imposed by section 1411 on an individual’s net investment income is not applicable to wages, RRTA compensation, or self-employment income. Thus, an individual will not owe net investment income tax on these categories of income, regardless of the taxpayer’s filing status. See more information on the Net Investment Income Tax.
An individual will owe Additional Medicare Tax on wages, compensation and self-employment income (and that of the individual’s spouse if married filing jointly) that exceed the applicable threshold for the individual’s filing status. Medicare wages and self-employment income are combined to determine if income exceeds the threshold. A self-employment loss is not considered for purposes of this tax. RRTA compensation (which does not include non-qualified stock options granted to RR employees) is separately compared to the threshold.
Yes. All wages not paid in cash, such as noncash fringe benefits, that are subject to Medicare tax are subject to Additional Medicare Tax, if, in combination with other wages subject to Medicare tax (and self-employment income if applicable), they exceed the individual's applicable threshold. Similarly, all RRTA compensation not paid in cash that is subject to Medicare tax is subject to Additional Medicare Tax, if, in combination with other RRTA compensation, it exceeds the individual's applicable threshold (note that non-qualified stock options granted to railroad employees are not considered RRTA compensation and therefore not subject to Additional Medicare Tax). Noncash wages and RRTA compensation are subject to Additional Medicare Tax withholding, if, in combination with other wages, or with other compensation in the case of RRTA compensation, they exceed the $200,000 withholding threshold.
Yes. Tips are subject to Additional Medicare Tax, if, in combination with other wages, they exceed the individual’s applicable threshold. Tips are subject to Additional Medicare Tax withholding, if, in combination with other wages paid by the employer, they exceed the $200,000 withholding threshold.
An employer must withhold Additional Medicare Tax from wages it pays to an individual in excess of $200,000 in a calendar year, without regard to the individual’s filing status or wages paid by another employer. An individual may owe more than the amount withheld by the employer, depending on the individual’s filing status, wages, compensation, and self-employment income. In that case, the individual should make estimated tax payments and/or request additional income tax withholding using Form W-4, Employee's Withholding Certificate.
An employer must withhold Additional Medicare Tax from RRTA compensation it pays to an individual in excess of $200,000 in a calendar year without regard to the individual’s filing status or compensation paid by another employer. An individual may owe more than the amount withheld by the employer, depending on the individual’s filing status, wages, compensation, and self-employment income. In that case, the individual should make estimated tax payments and/or request additional income tax withholding using Form W-4, Employee's Withholding Allowance Certificate.
No. However, if you anticipate liability for Additional Medicare Tax, you may request that your employer withhold an additional amount of income tax withholding on Form W-4. The additional income tax withholding will be applied against your taxes shown on your individual income tax return (Form 1040 or 1040-SR), including any Additional Medicare Tax liability.
No. Your employer must withhold Additional Medicare Tax on wages it pays to you in excess of $200,000 in a calendar year. Your employer cannot honor a request to cease withholding Additional Medicare Tax if it is required to withhold it. You will claim credit for any withheld Additional Medicare Tax against the total tax liability shown on your individual income tax return (Form 1040 or 1040-SR).
If you anticipate that you will owe Additional Medicare Tax but will not satisfy the liability through Additional Medicare Tax withholding (for example, because you will not be paid wages in excess of $200,000 in a calendar year by an employer), you should make estimated tax payments and/or request additional income tax withholding using Form W-4.
If you anticipate that you will owe Additional Medicare Tax but will not satisfy the liability through Additional Medicare Tax withholding and did not request additional income tax withholding using Form W-4, you may need to make estimated tax payments. You should consider your estimated total tax liability in light of your wages, other compensation, and self-employment income, and the applicable threshold for your filing status when determining whether estimated tax payments are necessary.
No. An individual cannot designate any estimated payments specifically for Additional Medicare Tax. Any estimated tax payments that an individual makes will apply to any and all tax liabilities on the individual income tax return (Form 1040 or 1040-SR), including any Additional Medicare Tax liability.
Yes. Individuals will calculate Additional Medicare Tax liability on their individual income tax returns (Form 1040 or 1040-SR),using Form 8959, Additional Medicare Tax. Individuals will also report Additional Medicare Tax withheld by their employers on their individual income tax returns. Any Additional Medicare Tax withheld by an employer will be applied against all taxes shown on an individual’s income tax return, including any Additional Medicare Tax liability.
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.
Example 1. C, a single filer, has $130,000 in wages and $145,000 in self-employment income.
Example 2. D and E are married and file jointly. D has $150,000 in wages and E has $175,000 in self-employment income.
Example 3. F, who is married filing separate, has $175,000 in wages and $50,000 in self-employment income.
Example 4. G, a head of household filer, has $225,000 in wages and $50,000 in self-employment income. G’s employer withheld Additional Medicare Tax on $25,000 ($225,000 minus the $200,000 withholding threshold).
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.
Example. J and K, are married and file jointly. J has $190,000 in wages subject to Medicare tax and K has $150,000 in compensation subject to RRTA taxes. J and K do not combine their wages and RRTA compensation to determine whether they are in excess of the $250,000 threshold for a joint return. J and K are not liable to pay Additional Medicare Tax because J’s wages are not in excess of the $250,000 threshold and K’s RRTA compensation is not in excess of the $250,000 threshold.
The threshold applicable to an individual’s filing status is applied separately to RRTA compensation and self-employment income. In calculating Additional Medicare Tax on self-employment income, an individual does not reduce the applicable threshold for the taxpayer's filing status by the total amount of RRTA compensation.
Example. F and G are married and file jointly. F has $160,000 in self-employment income and G has $140,000 in compensation subject to RRTA taxes. The $140,000 of RRTA compensation does not reduce the threshold at which Additional Medicare Tax applies to self-employment income. F and G are not liable to pay Additional Medicare Tax because F's self-employment income is not in excess of the $250,000 threshold and G’s RRTA compensation is not in excess of the $250,000 threshold.
Individuals who are married filing separate spouses in a community property state will calculate their Additional Medicare Tax liability, using the married filing separate threshold amount of $125,000, without regard to the income tax treatment of the community property income:
Example. A and B live in a community property state and are married filing separate. A has $200,000 in wages and B has $100,000 in self employment income. A is liable for Additional Medicare Tax on $75,000, the amount by which A’s wages exceed the $125,000 threshold for married filing separate. B’s self-employment income of $100,000 does not exceed the $125,000 threshold, so B does not owe Additional Medicare Tax.
The credit for any Additional Medicare Tax withheld on wages applies only to the wage earner. However, in community property states, half of any income tax withholding on one spouse’s wages will be credited to the other spouse. By contrast, each spouse can take full credit for the estimated tax payments that he or she made. However, if married filing separate spouses made joint estimated tax payments, either spouse can claim all of the estimated tax paid, or they may agree to divide it between them. If they cannot agree on how to divide it, each spouse may claim credit for the portion of the estimated tax payments that equals the total estimated tax paid times the tax shown on the spouse’s separate return, divided by the combined total of the tax shown on both spouses’ returns.
As a result, an individual living in a community property state who is a married filing separate spouse and who anticipates Additional Medicare Tax liability should be aware that the credit for any additional income tax withholding will be split between both spouses but that estimated tax payments can be fully claimed by the spouse who made them or, if made jointly, divided between them as agreed or in proportion to their tax liability.
Example. C and D are married filing separate spouses living in a community property state. C has $150,000 in self-employment income and D has $240,000 in wages. C is liable for Additional Medicare Tax on $25,000 of self-employment income, the amount by which C’s self-employment income exceeds the $125,000 threshold for married filing separate. D is liable for Additional Medicare Tax on $115,000 of wages, the amount by which D’s wages exceed the $125,000 married filing separate threshold. D’s employer will only withhold Additional Medicare Tax on the amount of D’s wages that exceed $200,000, in this case $40,000. D must pay the remaining Additional Medicare Tax liability on $75,000 through increased income tax withholding, estimated tax payments, or payment with D’s income tax return. If D requests additional federal income tax withholding, half of this additional withholding must be credited to C. However, if D makes estimated tax payments, these payments will be credited entirely to D. If C and D make joint estimated tax payments, these payments may be divided between them as agreed or in proportion to their tax liability.
Registered domestic partners (RDPs) are not married for federal tax purposes so they can only use the single filing status or, if they qualify, the head of household status. Thus, their threshold for Additional Medicare Tax is $200,000. Individuals who are RDPs in a community property state will calculate their Additional Medicare Tax liability as follows:
Example 1: E and F are RDPs who are subject to their state’s community property laws. E has $150,000 in wages and F has $125,000 in wages. Since neither E nor F has wages that exceed the threshold of $200,000, neither E nor F owes Additional Medicare Tax.
Example 2: G and H are RDPs who are subject to their state’s community property laws. G has $300,000 in wages and H has $100,000 in self-employment income. G and H must each calculate Additional Medicare Tax on half of H’s self-employment income. G will calculate Additional Medicare Tax on $300,000 in wages and $50,000 in self-employment income. G’s wages exceed the $200,000 threshold amount by $100,000, so G is liable for Additional Medicare Tax on $100,000 in wages. Before calculating the Additional Medicare Tax on self-employment income, G’s $200,000 threshold is reduced by G’s $300,000 in wages (but not below zero), resulting in a reduced self-employment income threshold for G of $0. G is therefore also liable for Additional Medicare Tax on $50,000 in self-employment income.
H calculates Additional Medicare Tax only on $50,000 in self-employment income (half of H’s total self-employment income). Since $50,000 is below H’s $200,000 threshold, H does not owe Additional Medicare Tax.
The credit for any Additional Medicare Tax withheld on wages applies only to the wage earner. However, in community property states, half of any income tax withholding on wages will be credited to the other RDP. By contrast, each RDP takes full credit for the estimated tax payments that he or she made. RDPs cannot make joint estimated tax payments.
As a result, an individual in a community property state who is an RDP and who anticipates Additional Medicare Tax liability should be aware that the credit for any additional income tax withholding will be split between both RDPs but that estimated tax payments are fully claimed by the RDP who made them.
Example: J and K are RDPs who are subject to their state’s community property laws. J has $250,000 in wages and K has $50,000 in self-employment income. Because half of K’s self-employment income must be reported by J for Additional Medicare Tax purposes, J is liable for Additional Medicare Tax on $50,000 of wages and $25,000 of self-employment income. However, J’s employer will only withhold Additional Medicare Tax on the amount of J’s wages that exceed $200,000, in this case $50,000. J must pay the remaining Additional Medicare Tax liability on $25,000 through increased income tax withholding, estimated tax payments, or payment with J’s income tax return. If J decides to increase federal income tax withholding to cover the liability, half of this additional withholding must be credited to K. However, if J makes estimated tax payments, these payments will be credited entirely to J.
K calculates Additional Medicare Tax only on $25,000 in self-employment income (half of K’s total self-employment income). Since $25,000 is below K’s $200,000 threshold, K does not owe Additional Medicare Tax.