Additional Medicare Tax: Information for Employers

A has $200,000 in wages and B has $100,000 in self employment income. A is liable for Additional Medicare Tax on $75,000, the amount by which A’s wages exceed the $125,000 threshold for married filing separate. B’s self-employment income of $100,000 does not exceed the $125,000 threshold, so B does not owe Additional Medicare Tax. Second, the rules for withholding the Additional Medicare Tax are different from the withholding rules for the regular Medicare tax. Employers withhold the Additional Medicare Tax on all Medicare wages in excess of $200,000 for every employee, regardless of filing status.

Additional Medicare Tax for Self-Employed Individuals

I’m a dad, husband, Certified Financial Planner, tax practitioner, retired Navy veteran, and writer. I love to write articles on financial topics and IRS tax forms. I especially like to explore financial planning subjects that no one else has tackled before, and help people with financial questions they haven’t found the answers to. Taxpayers filing IRS Form 1040-PR or Form 1040-SS should enter this amount on Line 12, Part I of their respective forms. Enter the total Medicare tax withheld on your Form W-2 by your employer.

Even if not liable for the tax, an employer that does not meet its withholding, deposit, reporting, and payment responsibilities for Additional Medicare Tax may be subject to all applicable penalties. The threshold applicable to an individual’s filing status is applied separately to RRTA compensation and self-employment income. In calculating Additional Medicare Tax on self-employment income, an individual does not reduce the applicable threshold for the taxpayer’s filing status by the total amount of RRTA compensation.

Is remuneration not paid in cash, such as fringe benefits, subject to Additional Medicare Tax?

You may then deduct the employer-equivalent amount of your self-employed tax — half of the total amount — from your gross income. By paying this tax while you are working, you additional medicare tax 2020 are funding the services you may encounter once you become a Medicare beneficiary. People with higher incomes may also have to pay an additional Medicare tax of 0.9% to help pay for the Affordable Care Act. When reporting multiple amounts, include the total of all such amounts.

When must an employer withhold Additional Medicare Tax?

If you’re subject to this tax, your employer can withhold it from your paychecks, or you can make estimated payments to the IRS throughout the year. K calculates Additional Medicare Tax only on $25,000 in self-employment income (half of K’s total self-employment income). Since $25,000 is below K’s $200,000 threshold, K does not owe Additional Medicare Tax. H calculates Additional Medicare Tax only on $50,000 in self-employment income (half of H’s total self-employment income). Since $50,000 is below H’s $200,000 threshold, H does not owe Additional Medicare Tax.

What is IRS Form 8959?

• All Medicare wages, railroad retirement (RRTA) compensation, and self-employment income subject to the general Medicare tax are subject to the Additional Medicare Tax.
• You may then deduct the employer-equivalent amount of your self-employed tax — half of the total amount — from your gross income.
• If you have neither Medicare wages nor self-employment income, but you have RRTA compensation, skip to Part III.
• Additionally, the SSA announced that Social Security benefits for nearly 69 million Americans will increase 1.6 percent in 2020.
• Taxpayers should be aware that the employer is ultimately responsible for the deposit and payment of federal tax liabilities.
• When you file taxes, you’ll calculate your Additional Medicare Tax liability for the year.

The threshold applicable to an individual’s filing status is applied separately to each of these categories of income. If you paid too much based on your filing status, your employer cannot stop withholding your Additional Medicare Tax. However, overpayments are applied against the tax owed on your annual income tax filing and could lead to a tax refund. The tax imposed by section 1411 on an individual’s net investment income is not applicable to wages, RRTA compensation, or self-employment income. Thus, an individual will not owe net investment income tax on these categories of income, regardless of the taxpayer’s filing status.

Here’s a simple example of how the Additional Medicare Tax calculations work for an employee who is single and has an annual income of $225,000. The single employee must pay the additional tax on earnings over $200,000 for the year, which is the same as the withholding start amount. There is no regular withholding for self-employment tax, so if you expect that your income might be above the levels above, you may need to increase your estimated tax payments to account for the additional Medicare tax. Employees can submit the current 2019 Form W-4 through the end of the year or wait until the new 2020 Form W-4 is finalized and released, likely in November. The new form is expected to include major revisions designed to make accurate income-tax withholding easier for employees.

• As part of the Federal Insurance Contributions Act (FICA), the Social Security Administration (SSA) collects payments from taxpayers that go toward funding Medicare.
• Any payment owed or refund adjustment needed will be added to your overall required payment or refund amount.
• Employers withhold the amount for the Additional Medicare Tax, much as they do for the regular Medicare tax.
• Employers withhold the Additional Medicare Tax on all Medicare wages in excess of $200,000 for every employee, regardless of filing status.
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• Employers are required to withhold the additional 0.9% for employees with salaries that are at or over these income limits.

The WEP, which has now been eliminated, reduced Social Security benefits for workers who also had pension or disability benefits from jobs where they did not pay Social Security payroll taxes. If you are self-employed, you are responsible for the entire 2.9% share of your earned income for the Medicare tax. The self-employment tax covers your entire 15.3% of FICA taxes, paying your share of Social Security and Medicare taxes.

Social Security and Medicare Tax Withholding Rates and Limits

For individuals with a salary above these thresholds, the employer withholds the additional 0.9%. The additional Medicare tax of 0.9% applies only to higher wage earners. Additional benefit income for individuals affected by the Social Security Fairness Act may also result in higher income-based surcharges for Medicare Parts B and D.