When Did the IRS Start Charging Additional Medicare Tax?
The IRS included additional Medicare tax starting January 1, 2013 as part of the Affordable Care Act (ACA). This extra tax applies to individuals with incomes exceeding specific limits for earned income, self-employment income, and railroad retirement compensation.
Who Pays Additional Medicare Tax?
Single and head of household filers earning over $200,000, married filing separately filers earning over $125,000, and married couples filing jointly earning over $250,000 will pay a 0.9% additional Medicare tax to the IRS.
This 0.9% is in addition to the standard Medicare tax rate of 1.45% of earned income. Employers must also pay 1.45% for a total standard Medicare tax rate of 2.9%.
For taxpayers subject to both the standard and additional Medicare tax, their total Medicare tax rate equals 2.35%. Remember that self-employed individuals must pay the full 2.9% standard Medicare tax themselves, so their total Medicare tax rate with additional Medicare tax will be 3.8%.
Do You Have to Pay Additional Medicare Tax on Self-Employment or Gig Income?
When your earnings exceed your filing status threshold, you may have to pay additional Medicare tax on self-employment or gig income. Additional Medicare tax is calculated on your total earned income, including any wages and self-employment or gig income.
If a freelance website designer earns $230,000 and files as head of household or single, they must pay the additional 0.9% Medicare tax.
Do You Only Pay the Additional Medicare Tax on the Portion of Income That Exceeds Threshold Amounts?
Yes, additional Medicare tax applies only to the portion of your income that exceeds your filing status threshold.
For example, the self-employed freelance website designer who makes $230,000 will pay the standard Medicare tax of 2.9% on $200,000 and the additional Medicare tax rate of 0.9% on $30,000.
Another example is a married couple filing as “married filing separately.” Jill earns $150,000 in wages and $50,000 in self-employment income. She must pay additional Medicare tax on $25,000 of her $150,000 wages.
This is because when she subtracts the threshold amount of $125,000 for married filing separately, she is left with $25,000 in wages for additional Medicare tax. Moreover, her total wages of $150,000 reduces her self-employment income threshold to zero for the tax.
Therefore, Jill will also have to pay additional Medicare tax on her full self-employment income of $50,000 and file Form 8959 when she submits her 1040 to the IRS.
What Is Form 8959 for Additional Medicare Tax?
Taxpayers must file IRS 8959 if any one or more of the following applies to their filing status threshold:
- Total income exceeds the threshold for filing status, including spouse’s income when filing jointly
- Medicare wages and tips exceeds $200,000
- RRTA compensation exceeds $200,000
- Combined RRTA compensation and tips exceeds the threshold for filing status
Form 8959 has three parts for calculating additional Medicare tax for (1) Medicare wages, (2) self-employment income, and (3) railroad retirement compensation.
Part IV totals how much additional Medicare tax you owe by adding up the tax from parts 1-3. Include this amount on 1040 Schedule 2. Part V computes additional Medicare tax withholding. Add this amount to federal tax withholding on Form 1040.
Note that you cannot ask your employer to stop withholding additional Medicare tax if it is required to.
If you do not owe Additional Medicare tax when you file your taxes, you can get money back for any additional Medicare tax that you paid or was withheld from your pay.
Do You Have to Pay Additional Medicare Tax on Noncash Fringe Benefits, Commissions, and Bonuses?
Wages subject to Medicare tax, including noncash benefits, trigger additional Medicare tax when they exceed an individual’s threshold and other applicable earnings. According to the IRS, a noncash fringe benefit is any compensation an employer provides to an employee in addition to their regular wages that is not in the form of cash.
Examples of taxable noncash fringe benefits include personal use of company vehicles, free or discounted travel and lodging, and gym or club memberships.
Nontaxable, noncash fringe benefits include employer-provided health insurance, some educational assistance programs, and employee discounts on company products or services.
Need more help? You can start online by answering 6 simple questions.
6 Simple Questions. Free Evaluation.