Beginning in 2013, a 0.9% additional Medicare tax is imposed on higher-income earning individuals. This additional medicare tax also has an effect on people who earn self-employment income. On Nov. 26, 2013, the IRS issued final regulations (TD 9645) implementing the Additional Medicare Tax as added by the Affordable Care Act (ACA). In all future tax years, additional Medicare taxes may be due.
When are individuals liable for Additional Medicare Tax?
The 0.9% additional Medicare tax, which is in addition to the 2.9% (regular) Medicare tax that taxpayers currently pay, applies to self-employment income in excess of $250,000 for joint filers, $125,000 for married individuals filing separately, and $200,000 for all others. There is more information on this on the chart below.
Self-Employed Paying 0.9% Additional Medicare tax
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:
|Married filing jointly||$250,000|
|Married filing separate||$125,000|
|Head of household (with qualifying person)||$200,000|
|Qualifying widow(er) with dependent child||$200,000|
But these thresholds for application of the tax are reduced by any wage income that either you or your spouse earn. Wages for this purpose are defined the same as for the regular Medicare tax and so may include items such as taxable noncash benefits and tips. When you or your spouse (or both you and your spouse) have both self-employment income and wage income, calculating what portion of your income is subject to the additional Medicare tax can get complicated.
Employer Portion of Medicare Tax
Self-employed taxpayers should also note that unlike the “employer” portion (1.45%) of the regular 2.9% Medicare tax paid by self employed individuals, additional Medicare tax is paid only by the “employee” (not the employer) and so a business deduction can’t be taken for additional Medicare tax payments. If you anticipate that you’ll owe the additional Medicare tax, you can account for that liability in determining your estimated income tax payments.
Paying Medicare Tax with Estimated Taxes
You’ll need to consider your estimated total tax liability in light of your self-employment income, wages, and other compensation, as well as the threshold for imposition of the additional Medicare tax for your filing status. Also, if you or your spouse also earn wages as an employee, you have the option of filing a new Form W-4 with the employer, and requesting that an additional amount of income tax be withheld from your, or your spouse’s, paycheck. (You can’t request that your employer just withhold more additional Medicare tax.) Any estimated tax payments or additional income tax withholding can then be applied against any and all tax liabilities shown on your individual return, including any additional Medicare tax liability.
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.
How to Report and Pay Medicare tax on Form 8959?
You will report Additional Medicare Tax on Form 8959, Additional Medicare Tax, and attach Form 8959 to your income tax return. 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.