CARL WATTS & ASSOCIATES

October 24, 2016

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What You Need To Know About
the Additional Medicare Tax
The Additional Medicare Tax was legislated as part of the Patient Protection and Affordable Care Act amended by the Health Care and Education Reconciliation Act of 2010. These two laws reformed the health care market by requiring individuals to obtain health insurance or pay a tax penalty.

The additional Medicare tax was included as a revenue raiser in that legislation.

At the time the legislation was passed, the Joint Committee on Taxation estimated that the Additional Medicare Tax and the Unearned Income Medicare Contribution Act would together generate an additional $20.5 billion in tax revenue in the year 2013, the first year that the Medicare surtax was in effect. So, it seems fair to say that the additional Medicare tax is designed so wealthier Americans help to pay for the cost of insurance and medical care for lower-income citizens.

The supplemental Medicare tax rate of 0.9% is applied to any wages earned in excess of $200,000 for single, head of household or Qualifying widower, $250,000 for married filing jointly, or $125,000 for married filing separately filers.


The supplemental Medicare tax is also due on self-employment income, such as earnings from a Form 1099-Misc, above the starting earnings amounts. If you are self-employed, you now pay your own regular Medicare tax, and the Additional Medicare tax.


Medicare wages are an employee's total wages for the year, less any benefit deductions that offset Medicare wages themselves (such as medical and dental insurance and contributions to a dependent care flexible spending arrangement).


Medicare wages and self-employment income are combined to determine if income exceeds the threshold. A self-employment loss should not be considered for purposes of this tax. Railroad retirement compensation should be separately compared to the threshold.


The value of taxable wages not paid in cash, such as non-cash fringe benefits, are subject to Additional Medicare Tax, if, in combination with other wages, they exceed the individual’s applicable threshold. Non-cash wages are subject to Additional Medicare Tax withholding, if, in combination with other wages paid by the employer, they exceed the $200,000 withholding threshold.



As you know, medicare taxes are paid by all employees and self-employed individuals as part of FICA taxes (which include both Medicare taxes and Social Security (OASDI) taxes. The Medicare tax rate is 1.45% and this rate is applied to all employee wages; there is no maximum wage limit for Medicare taxes, as there is for Social Security taxes.


The IRS specifies that the employer is also responsible for withholding the Additional Medicare Tax from wages or railroad retirement compensation it pays to an employee in excess of $200,000 in a calendar year, without regard to filing status or wages paid by another employer. The employer is required to begin withholding Additional Medicare Tax in the pay period in which it pays wages or railroad retirement compensation in excess of $200,000 to an employee and continue to withhold it each pay period until the end of the calendar year. There is no employer match for Additional Medicare Tax.


There are no special rules for nonresident aliens and U.S. citizens living abroad for purposes of this provision. Medicare wages, railroad retirement compensation, and self-employment income earned by such individuals will also be subject to Additional Medicare Tax, if in excess of the applicable threshold for their filing status.

You should check whether you may need to adjust your withholding or make estimated tax payments to account for your Additional Medicare Tax liability.

Depending on the your filing status, wages, compensation, and self-employment income, you may owe more than the amount withheld by your employer. In this case, you should make estimated tax payments and/or request additional income tax withholding using Form W-4, Employee's Withholding Allowance Certificate.

If you are liable for Additional Medicare Tax and/or your employer withheld Additional Medicare Tax from your wages or compensation, you must file Form 8959 with your income tax return.

If you are an employer and you do not deduct and withhold Additional Medicare Tax as required, you are liable for the tax unless the tax that you failed to withhold from the employee’s wages is paid by the employee. As an employer you are not relieved of your liability for payment of any Additional Medicare Tax required to be withheld unless you can show that the tax has been paid by filing Forms 4669 and 4670. Even if not liable for the tax, as an employer that does not meet its withholding, deposit, reporting, and payment responsibilities for Additional Medicare Tax, you may be subject to all applicable penalties.

There is no change to the boxes on the Form W-2. The employer will enter the total employee Medicare tax (including any Additional Medicare Tax) withheld on Medicare wages and tips in box 6 (“Medicare tax withheld”). A railroad employer will report Additional Medicare Tax in box 14.


If you are self-employed, your self-employment income is the total of all self-employment income from Schedule C, Schedule F, and self-employment income from partnerships (Schedule K-1), after any business-related deductions, and after the total self-employment income has been reduced by multiplying it by 92.35%. Total net self-employment income is found on Schedule SE on either section A, line 4 or section B, line 6.

The only deductions that reduce net self-employment income are deductions that go into calculating the net income for Schedule C, Schedule F, or a partner's self-employment income on Schedule K-1.

Any deductions that show up as adjustments to income on page one of Form 1040 reduce taxable income for the federal income tax, but not for the self-employment tax and the additional Medicare tax. Such deductions include the deduction for self-employed health insurance, the deduction for contributions to a SEP-IRA or other self-employed retirement plan, and the deduction for half the self-employment tax; these deductions reduce the income tax only, and do not reduce the additional Medicare tax.

The Additional Medicare Tax on self-employed income is not part of the self-employment tax (the regular Social Security and Medicare taxes on self-employed income). Since the Additional Medicare Tax is a tax imposed on the individual, the Additional Medicare Tax is not included with the deduction for half the self-employment tax.

If you receive wages subject to FICA tax and self-employment income subject to SECA tax, you need to calculate your liabilities for Additional Medicare Tax in three steps.

First step is to 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.

In the second step, you have to reduce the applicable threshold for the filing status by the total amount of Medicare wages received, but not below zero.

The third step is to calculate Additional Medicare Tax on any self-employment income in excess of the reduced threshold. Net self-employment income, for the purpose of calculating the additional Medicare tax, cannot be less than zero. So, any business losses will not reduce the additional Medicare tax owed on wage compensation.

If all this seems complicated (as it could well be the case), the best course of action is to ask for help from your tax or financial advisor.
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