What is the Additional Medicare Tax for high earners?

This material has been provided for general informational purposes only and does not constitute either tax or legal advice. Although we go to great lengths to make sure our information is accurate and useful, we recommend you consult a tax preparer, professional tax advisor, or lawyer. Nearly everyone who works in the United States is subject to the Medicare tax, regardless of their citizenship or residency status. Non-resident aliens with H-2, H-2A, J-, and Q-visas may be exempt from Medicare taxes if they meet all the IRS exemption requirements.

Once an employee earns more than the threshold, employers are responsible for withholding additional Medicare tax on those wages. Employers do not have a responsibility to contribute to the additional Medicare tax rate though there are other taxes employers do pay. An employer that does not deduct and withhold Additional Medicare Tax as required is liable for the tax unless the tax that it failed to withhold from the employee’s wages is paid by the employee. An employer is not relieved of its liability for payment of any Additional Medicare Tax required to be withheld unless it can show that the tax has been paid by filing Forms 4669 and 4670.

History of the Additional Medicare Tax

The employee must claim a credit using their appropriate Form 1040 or 1040 SR. If you’ve ever looked at your earnings statement from a job, you have likely noticed some tax withholding. As part of your overall payroll taxes, the federal government requires employers to collect the FICA (Federal Insurance Contributions Act) tax. Social Security taxes fund Social Security benefits and the Medicare tax goes to pay for the Medicare Hospital Insurance (HI) that you’ll get when you’re a senior.

• 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.
• All Medicare wages, railroad retirement (RRTA) compensation, and self-employment income subject to Medicare Tax are subject to Additional Medicare Tax, if paid in excess of the applicable threshold for the taxpayer’s filing status.
• All FAQs that discuss the application of the Additional Medicare Tax to wages also apply to RRTA compensation, unless otherwise indicated.
• The Medicare tax is a tax charged to individuals in order to fund the Medicare system.
• If your wages exceed the threshold, simply add taxes of an additional 0.9% of your Medicare wages.
• Aliens who are residents of the United States are generally subject to the same tax rules as U.S. citizens, including Self-Employment Contributions Act (SECA) tax rules.

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. 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. The Additional Medicare Tax also applies to Railroad Retirement Tax Act compensation for employees and employee representatives.

Special Circumstances Can Affect SECA Liability

The number included in this box will usually be identical to the “wages, tips, other compensation” section on the W-2 form. These matching numbers show that the Medicare tax is based on 100% of an employee’s earnings. As a bit of background, the existing Medicare tax applies to wages and net earnings from self-employment at a rate of 2.9% and is not limited to a certain wage base as is the Social Security tax. Employers are required to pay half of this tax, while the self-employed pay the entire amount themselves. Simply withhold the additional Medicare tax from wages that exceed $200,000.

A self-employment loss is not taken into account while calculating this tax. Compare the threshold with the railroad retirement (RRTA) compensation individually. If you earn $200,000 or less, your employer will not withhold any of the additional Medicare tax. There’s no requirement that an employer must notify an employee of the tax, and they can’t honor an employee’s request to cease withholding it. There’s also no employer match for the Additional Medicare Tax. Yes, if you are an employed individual in the United States, you have to pay the Medicare tax, even if you or your employer are not a citizen of the country.

Why do I pay Medicare tax?

The Social Security Administration recently announced that the wage base for computing Social Security tax will increase to $147,000 for 2022 (up from $142,800 for 2021). Wages and self-employment income above this threshold aren’t subject to Social Security tax. As mentioned above, the Additional Medicare Tax pays for some elements of the ACA. When the ACA went into effect, it provided additional benefits to Medicare enrollees. The above article is intended to provide generalized financial information designed to educate a broad segment of the public; it does not give personalized tax, investment, legal, or other business and professional advice. Before taking any action, you should always seek the assistance of a professional who knows your particular situation for advice on taxes, your investments, the law, or any other business and professional matters that affect you and/or your business.

You must continue withholding Medicare taxes regardless of what your employees earn. Medicare and Social Security taxes make up FICA (Federal Insurance Contributions Act) tax and benefit the public. Both Medicare and Social Security are employee and employer payroll taxes. In other words, you withhold the proper amount from an employee’s paycheck and make a matching contribution for both Medicare insurance and Social Security. Employers and employees split that cost with each paying 1.45%.

What Is Medicare Tax?

Our experts continually monitor the health and wellness space, and we update our articles when new information becomes available. The Additional Medicare Tax helps supplement the cost of these new Medicare benefits.

• Total net self-employment income is found on Schedule SE Line 4a.
• M’s employer is required to withhold Additional Medicare Tax on $30,000 of the $50,000 bonus and may not withhold Additional Medicare Tax on the other $20,000.
• 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.
• The Additional Medicare Tax for separate filers is based on each spouse’s separate wages.

M’s employer also must withhold Additional Medicare Tax on any other wages paid in December 2013. Medicare taxes go toward the Medicare program—a federal health insurance program for Americans who are older than 65 or have certain disabilities and diseases. To make Medicare https://turbo-tax.org/ tax deposits, follow your depositing schedule, which is either monthly or semi-weekly. Your schedule is determined by your reported tax liability using a four-quarter IRS lookback period. If you have employees, you’re responsible for handling and paying Medicare tax.

You’ll understand your financial situation all the better after a consultation. The total self-employment income is then reduced by multiplying it by 92.35% (essentially deducting the employer’s share of FICA, 7.65%). Total net self-employment income is found on Schedule SE Line 4a. For additional information, refer to the Instructions for Form 8959 PDF and to Questions and Answers for the Additional Medicare Tax. When providing the deposit detail, regular Medicare tax and Additional Medicare Tax are entered as one combined amount. Calculate Additional Medicare Tax on any self-employment income in excess of the reduced threshold.

Because Medicare is an employee and employer tax, you must withhold 1.45% from an employee’s wages and contribute a matching 1.45%. All wages currently subject to the Medicare Tax are also subject to the Additional Medicare Tax. An individual owes Additional Medicare Tax on all cumulative wages, compensation, and self-employment income that exceeds the threshold for their filing status. The Affordable Care Act expanded the Medicare payroll tax to include the Additional Medicare Tax. This new Medicare tax increase requires higher wage earners to pay an additional tax ( 0.9% ) on earned income.

Understanding the Medicare Tax for High Earners

This article contains information that’s meant to be informative and shouldn’t be taken as legal advice. Contact a tax or financial professional to determine your organization’s tax obligations. According to the IRS, there are no special rules for nonresident aliens and U.S. citizens living abroad. Erika Rasure is globally-recognized https://turbo-tax.org/medicare-surtax-on-wages-and-self/ as a leading consumer economics subject matter expert, researcher, and educator. She is a financial therapist and transformational coach, with a special interest in helping women learn how to invest. Employers may not withhold the full amount due, so it is a good idea to calculate the amount due for one’s self.