Additional Medicare Tax is a tax that is imposed on certain high-income individuals in the United States to help fund the Medicare program. Medicare is a government health insurance program that provides coverage for individuals who are 65 years or older, certain individuals with disabilities, and those with end-stage renal disease. The Additional Medicare Tax was introduced as part of the Affordable Care Act (ACA) and went into effect on January 1, 2013. It applies to individuals whose wages, self-employment income, or railroad retirement compensation exceed certain thresholds. The Additional Medicare Tax rate is 0.9%. Employers are responsible for withholding the Additional Medicare Tax from an employee's wages once the employee's wages reach a certain threshold. However, if an individual's employer does not withhold enough of the tax, the individual may need to pay the remaining amount when filing their annual income tax return. For most individuals, the Additional Medicare Tax applies when their wages, self-employment income, or RRTA compensation exceeds $200,000 for single filers, $250,000 for married couples filing jointly, and $125,000 for married individuals filing separately. These thresholds are not adjusted for inflation and remain the same each year unless updated by new legislation. The Additional Medicare Tax is only applicable to earned income. It does not apply to investment income, such as dividends, capital gains, or rental income. The Additional Medicare Tax is reported on an individual's federal income tax return using Form 8959, "Additional Medicare Tax." This form helps individuals calculate the amount of tax owed and reconcile any amounts withheld by their employer.
What is Additional Medicare Tax ?
How Additional Medicare Tax Works ?
The Additional Medicare Tax only applies to earned income and self-employment income above the threshold amounts. Here's how it works: 1) Thresholds: The Additional Medicare Tax applies to individuals whose wages, self-employment income, or railroad retirement compensation exceed specific income thresholds. The thresholds are $200,000 for individuals filing as single or head of household, $250,000 for married couples filing jointly, and $125,000 for married individuals filing separately. 2) Tax Rate: The Additional Medicare Tax rate is 0.9%. It is applied in addition to the regular Medicare tax rate of 1.45%. Therefore, individuals subject to the Additional Medicare Tax pay a total Medicare tax rate of 2.35% on their earnings exceeding the applicable threshold. 3) Withholding: If you are an employee, your employer is responsible for withholding the Additional Medicare Tax from your wages once your earnings surpass the threshold. The withheld tax amount is reported on your Form W-2 and helps cover your tax liability when you file your annual income tax return. 4) Self-Employment: If you are self-employed, you must calculate and pay the Additional Medicare Tax on your self-employment income. This tax is included in your estimated tax payments or reported on your annual income tax return. 5) Reconciliation: When you file your income tax return, you report the Additional Medicare Tax on Form 8959, "Additional Medicare Tax." This form calculates whether you owe any additional tax or if you have overpaid through withholding. 6) Refunds and Shortfalls: If you had multiple employers or your combined wages exceeded the threshold, you might have overpaid the Additional Medicare Tax. In such cases, you can claim a refund for the excess tax paid when filing your income tax return. Conversely, if not enough tax was withheld, you may need to make estimated tax payments or adjust your withholding to cover the shortfall.Who Pays Additional Medicare Tax ?
The Additional Medicare Tax is paid by certain individuals in the United States whose income exceeds specific thresholds. Here's who is responsible for paying the tax:
1) Employees:
If you are an employee, your employer is responsible for withholding the Additional Medicare Tax from your wages once your earnings reach the applicable threshold. Your employer will withhold the tax from your paycheck and remit it to the government on your behalf. The withheld amount will be reported on your Form W-2.
2) Self-Employed Individuals:
If you are self-employed, you are responsible for paying the Additional Medicare Tax on your self-employment income. You must calculate the tax amount and include it in your estimated tax payments or report it on your annual income tax return.
It's important to note that the Additional Medicare Tax applies to specific types of income, such as wages, self-employment income, and railroad retirement compensation. It does not apply to all types of income, such as investment income.
The income thresholds for the Additional Medicare Tax are as follows :
- Individuals filing as single or head of household: $200,000
- Married couples filing jointly: $250,000
- Married individuals filing separately: $125,000
If your income exceeds these thresholds, you may be subject to the Additional Medicare Tax.
Who is Exempt from Paying Additional Medicare Tax?
Certain individuals may be exempt from paying the Additional Medicare Tax. Here are some situations where individuals may be exempt:
1) Income below the threshold:
The Additional Medicare Tax applies only to individuals whose income exceeds specific thresholds. If your income is below the threshold, you are exempt from paying the tax. The thresholds, are $200,000 for individuals filing as single or head of household, $250,000 for married couples filing jointly, and $125,000 for married individuals filing separately.
2) Nonresident aliens:
Nonresident aliens, as defined by the IRS, are generally exempt from the Additional Medicare Tax. Nonresident aliens are individuals who are not U.S. citizens or U.S. nationals and do not meet the substantial presence test for the tax year.
3) Certain government employees:
Individuals who are employed by a state, local, or tribal government, or any political subdivision thereof, and their wages are not subject to the regular Medicare tax under a Section 218 Agreement are exempt from the Additional Medicare Tax.
4) Certain religious group members:
Members of a recognized religious group conscientiously opposed to accepting public insurance benefits are exempt from paying the Additional Medicare Tax. These individuals must meet specific criteria and apply for an exemption from the IRS.
Additional Medicare Tax Rate 2023
The Additional Medicare Tax rate is 0.9%. This means that individuals subject to this tax must pay an extra 0.9% on top of the regular Medicare tax rate of 1.45%. To clarify, the regular Medicare tax rate of 1.45% applies to all wages, self-employment income, and railroad retirement compensation. The Additional Medicare Tax of 0.9% is imposed on top of the regular rate for individuals whose income exceeds certain thresholds. Therefore, individuals subject to the Additional Medicare Tax pay a total Medicare tax rate of 2.35% on their earnings exceeding the applicable threshold.Additional Medicare Tax Example
Let's walk through an example of how the Additional Medicare Tax works:
Let's say you are an individual filing as single and your annual wage income is $300,000. The Additional Medicare Tax threshold for single individuals is $200,000.
Step 1: Calculate the amount of income subject to the Additional Medicare Tax :
Since your income exceeds the threshold, only the portion of your income above $200,000 is subject to the Additional Medicare Tax.
- In this case, the amount subject to the tax is $300,000 - $200,000 = $100,000.
Step 2: Calculate the Additional Medicare Tax amount :
The Additional Medicare Tax rate is 0.9%. Multiply the amount subject to the tax by the tax rate to find the Additional Medicare Tax owed.
- $100,000 x 0.9% = $900.
Step 3: Total Medicare tax owed :
Add the regular Medicare tax (1.45%) and the Additional Medicare Tax (0.9%) to determine the total Medicare tax owed.
- Regular Medicare Tax: $300,000 x 1.45% = $4,350
- Additional Medicare Tax: $900
- Total Medicare Tax: $4,350 + $900 = $5,250.
In this example, if your annual wage income is $300,000, you would owe a total of $5,250 in Medicare taxes, which includes the regular Medicare tax and the Additional Medicare Tax.
How to Pay Additional Medicare Tax ?
The Additional Medicare Tax is separate from the regular Medicare tax and is calculated and reported separately on tax returns. Here's how you can pay the Additional Medicare Tax: 1) Check your paystub: If you are an employee, your employer should withhold the Additional Medicare Tax from your wages once your income exceeds the applicable threshold. Review your paystub to see if the Additional Medicare Tax is being deducted. 2) Paying through withholding: If your employer doesn't withhold the Additional Medicare Tax or you have additional income subject to the tax, you can request that your employer withholds an additional amount from your paycheck to cover the tax. Complete a new Form W-4 and provide it to your employer to adjust your withholding. 3) Making estimated tax payments: If you have self-employment income, investment income, or other income not subject to withholding, you may need to make estimated tax payments. Use Form 1040-ES to calculate the amount of Additional Medicare Tax you owe and make quarterly payments to the IRS. The payments are due on April 15, June 15, September 15, and January 15 of the following year. 4) Reporting on your tax return: When you file your annual tax return, you need to report the Additional Medicare Tax you owe or have paid. Use Form 8959, Additional Medicare Tax, to calculate and report the amount on your Form 1040 or Form 1040NR. It's important to note that the Additional Medicare Tax is subject to certain rules and thresholds, so it's advisable to consult the most recent guidance from the Internal Revenue Service (IRS) or a tax professional to ensure you comply with the current regulations and requirements.Frequently Asked Questions
Q: What is the purpose of the Additional Medicare Tax? A: The Additional Medicare Tax was introduced to help fund the Medicare program, which provides health insurance coverage to eligible individuals in the United States. Q: Are all individuals subject to the Additional Medicare Tax? A: No, the tax applies only to individuals whose wages, self-employment income, or railroad retirement compensation exceed certain income thresholds. Q: Is the Additional Medicare Tax rate the same for all income levels? A: No, the Additional Medicare Tax rate is 0.9%. This is an additional tax on top of the regular Medicare tax rate of 1.45%. Q: How is the Additional Medicare Tax collected? A: The tax is typically collected through withholding by employers. They withhold the tax from an employee's wages once the earnings exceed the threshold. Q: What happens if an employer does not withhold enough Additional Medicare Tax? A: If not enough tax is withheld, individuals may need to make estimated tax payments or adjust their withholding to cover the tax liability. Q: Are self-employed individuals responsible for paying the Additional Medicare Tax? A: Yes, self-employed individuals are responsible for paying the tax on their self-employment income. They include it in their estimated tax payments or report it on their annual income tax return. Q: Can individuals claim a refund for overpaid Additional Medicare Tax? A: Yes, individuals can claim a refund for any excess tax paid if they had multiple employers or their combined wages exceeded the threshold. Q: Is the Additional Medicare Tax deductible for income tax purposes? A: No, the Additional Medicare Tax is not deductible when calculating federal income tax liability. Q: Where should I report the Additional Medicare Tax on my tax return? A: The Additional Medicare Tax is reported on Form 8959, "Additional Medicare Tax." This form calculates the tax owed or any excess amount withheld.
Q: Is the Additional Medicare Tax withheld by my employer? A: Yes, if you are an employee, your employer is responsible for withholding the Additional Medicare Tax from your wages once your earnings reach the applicable threshold. The withheld amount will be reported on your Form W-2.
