Starting in 2013, you will be subject to an additional Medicare tax of 0.9% if you have wages or self-employment income in excess of certain threshold amounts.
If you are an employee, be prepared – depending on your situation, it may increase the tax or reduce the overpayment on your individual income tax return. Although most employment taxes are satisfied by payroll tax withholding, this tax is structured differently and may apply to you as an individual. There is no employer contribution for the tax. Fortunately, any additional tax you owe will probably not be a significant amount because the tax rate is limited to 0.9% (nine-tenths of one percent) of wages in excess of the threshold amounts.
If you are self-employed, the additional Medicare tax will be included in the calculation of your self-employment tax. Since you are accustomed to paying the self-employment tax reported on your personal income tax return, you will see virtually no change except for the increase in the amount of tax to the extent your net self-employment exceeds the threshold amounts in the chart below.
Use the following chart to see if you will be liable for the tax. The tax will apply to the extent that your wages, other compensation, or self-employment income (together with that of your spouse if you file a joint return) exceed the threshold amount for your filing status.
| Filing Status
| Married filing jointly
| Married filing separately
| Head of household (with qualifying person)
| Qualifying widow(er) with dependent child
Employers are required to withhold, but this might not cover the entire amount
Although the new 0.9% Medicare tax applies to you as an individual, your employer is required to withhold this tax from your wages when they start exceeding $200,000. Your employer may disregard wages paid to your spouse. If you notice a change in your net pay during the year, look at your check stub – employers are not required to notify employees when they begin withholding the tax.
In operation, these rules can get a little tricky, so let’s look at some examples.
Adam and Eve are married and file a joint return. They both have wages of $200,000. Since neither one has wages exceeding $200,000, their employers do not withhold any of the new 0.9% Medicare tax.
When Adam and Eve file their 2013 joint income tax return, their combined wages total $400,000, which exceeds the $250,000 threshold amount by $150,000. Therefore, the new 0.9% Medicare tax will cost them $1,350 ($150,000 x .009) when they file their 2013 federal income tax return, assuming that they did not make any federal estimated tax payments or otherwise adjusted their income tax withholding.
Now it’s 2014. Adam and Eve are still married and file a joint return. Adam’s wages are now $300,000 and Eve is taking the entire year off and has no compensation.
Adam’s employer starts withholding for the 0.9% Medicare tax when Adam’s wages exceed $200,000. Adam’s employer withholds $900 of this tax from Adam’s wages in 2014 ([$300,000 - $200,000] x .009).
When Adam and Eve file their joint 2014 federal income tax return, their 0.9% Medicare tax, however, is only $450 ([$300,000 - $250,000 threshold amount] x .009). So Adam and Eve will be entitled to a refund of $450, the difference between the amount withheld of $900 and their actual liability of $450.
In 2015, Adam and Eve’s circumstances are exactly the same as they were in 2014 (Example 2 above). However, in 2015, Adam’s employer completely forgets to withhold any of the 0.9% Medicare tax.
When Adam and Eve file their 2015 joint federal income tax return, they will have to pay the $450 liability for the 0.9% Medicare tax.
Adam’s employer won’t be liable for any of Adam’s $450 tax liability, but may be subject to IRS penalties for withholding tax failures.
Can you ask for more withholding?
What can you do if you’re concerned about not having enough tax withheld? Although you can’t ask for more withholding specifically for this tax, you can use Form W-4 to request a specific additional amount of income tax withholding. This additional amount will be applied against all taxes shown on your income tax return, including any additional Medicare tax liability.
The IRS has a website containing 20 questions and answers about the new 0.9% Medicare tax. This covers how the new rules apply to various payments such as fringe benefits, tips, group term life insurance, third-party sick pay, and nonqualified deferred compensation. See the IRS’ Q&A on the Additional Medicare Tax for more information, and call us if you have any questions.
Jim Derzon, CPA, is an employee benefits specialist for our firm on technical matters pertaining to retirement plans and employee benefits. Jim works in these areas with our clients, large and small. He has extensive experience in both industry and public accounting.