High-wage earners pay more than the standard tax payment for Medicare on their individual income tax returns each year. If you employ highly compensated employees, you must ensure you withhold the correct amount for Medicare taxes. The Additional Medicare Tax is an extra 0.9% on earned income beyond a specific threshold limit. This additional tax payment has been around since 2013 as part of the Affordable Care Act (ACA).
The Additional Medicare Tax liability helps fund some parts of ACA, including premium tax credits (PTC). PTCs help lower-income Americans buy affordable individual or family health insurance.
In this article, we'll go over how the Additional Medicare Tax works and the income levels it applies to.
Takeaways from this blog post:
- The Additional Medicare Tax is a surtax that high-income earners must pay on their wages, self-employment income, and other compensation.
- This tax helps fund Medicare, which provides health insurance coverage for Americans age 65 or older.
- Individuals subject to this tax need to understand how to calculate it and ensure they have the necessary funds to cover the additional tax owed.
Medicare is a federal health insurance program. All employee and employer taxable wages are subject to the standard Medicare tax. This includes several types of income like salary and wages, overtime, and paid time off (PTO). Self-employment income is also subject to the tax.
The standard Medicare tax covers Medicare Part A. This is what provides medical insurance for senior citizens and people who live with disabilities. Medicare Part A pays for things like hospital stays, hospice, nursing facility care, and home health services. According to ValuePenguin1, the tax collected for Medicare funds 88% of Medicare Part A.
While Medicare is in its name, the Additional Medicare Tax goes toward the ACA, not Medicare Part A. This helps millions of Americans get the financial help they need when purchasing an individual health insurance plan on the ACA marketplaces.
The Internal Revenue Service2 (IRS) reports the current standard Medicare tax rate is 2.9% of an employee's taxable wages. Self-employed individuals pay the total amount on their own. In other cases, employers and employees split the 2.9% tax rate equally, each paying 1.45%.
High-income earners subject to the Additional Medicare Tax pay an additional 0.9% tax on earnings beyond a set applicable threshold.
A person is liable for the Additional Medicare Tax if their wages, compensation, investment earnings, self-employment earnings, or combined income with their spouse if they're joint fliers exceeds the applicable threshold for the individual's filing status.
According to the IRS, there are no special rules for nonresident aliens and U.S. citizens living abroad.
This chart provided by the IRS breaks it down.
|
Filing status |
Annual income threshold amount |
|
Married filing a joint return |
$250,000 |
|
Married filing separate returns |
$125,000 |
|
All other filers, including single taxpayers |
$200,000 |
It's important to note that the additional withholding of 0.9% tax only applies to taxable income in excess of the applicable threshold amount, whether single or joint filers. For example, if a self-employed single filer earns $250,000 in a year, they would pay 2.9% on the first $200,000 of their earnings, then 3.8% (2.9% + 0.9%) on the remaining $50,000.
Employers aren't subject to the Additional Medicare Tax. However, they must withhold the additional 0.9% for employees who earn more than $200,000 in a calendar year. An employer who fails payroll tax withholding the Additional Medicare Tax is liable for it unless the employee eventually pays the tax. Even if not liable for the tax, the IRS3 states that an employer who doesn't meet withholding, deposit, reporting, and tax payment responsibilities for the Additional Medicare Tax may be subject to other applicable penalties.
There's no requirement that an employer notify an employee of the tax on wages, and they can't honor an employee's request to cease withholding it from payroll taxes. There's also no employer match for the Additional Medicare Tax.
An employer can make corrections to Medicare tax withholding if they don’t withhold the correct amount.
Suppose an employer realizes they are under-withholding the Additional Medicare Tax. In that case, they should deduct the correct amount4 from other wages they pay to the employee by the end of the year. If the employer doesn't correct withholding by the end of the year, the employer may be liable for the amount it failed to withhold.
If the employer is over-withholding the Additional Medicare Tax, they should repay or reimburse the amount to the employee before the end of the year. They also need to make an interest-free adjustment on the appropriate corrected form.
As mentioned above, the Additional Medicare Tax pays for some elements of the ACA. When the ACA went into effect, it provided additional benefits to Medicare enrollees.
According to Healthline5, the Additional Medicare Tax helps cover the medical cost of these new benefits as well. They include:
On top of the standard Medicare tax payments, high-income earners pay the Additional Medicare Tax of 0.9%. The IRS has several rules to determine who qualifies based on filing status and income limits. So, married taxpayers filing together have a different income threshold than separate filers. Employers must meet their responsibilities for the Additional Medicare Tax or face a tax penalty.
This article is for informational purposes only and shouldn’t be relied on for tax or legal advice. Contact a tax or financial advisor to determine your organization's tax obligations.
This blog article was originally published on January 20, 2014. It was last updated on March 5, 2024.