Additional Medicare Tax

The Additional Medicare Tax is a 0.9 percent federal tax on an individual’s wages, Railroad Retirement Tax Act (RRTA) compensation and self-employment income above a threshold amount fixed by filing status. It applies to amounts received in taxable years beginning after December 31, 2012, and there is no employer match for it, so the individual carries the whole charge (IRS, Questions and answers for the Additional Medicare Tax).

The threshold amounts are $250,000 for married filing jointly, $125,000 for married filing separately, and $200,000 for single, head of household and qualifying surviving spouse filers, and they are not indexed for inflation (IRS, Instructions for Form 8959).

The employer’s own hospital insurance excise tax carries no matching charge beside it, which is set out in payroll tax, and the way the flat employer withholding trigger diverges from these filing-status thresholds is worked through in Medicare tax.

Three Code Sections, Three Separate Bases

One charge, three imposing provisions, and each reaches a different kind of earnings. That structure is why the same taxpayer can sit inside the tax on one base and outside it on another in the same year.

On wages, the Code imposes the tax on every taxpayer other than a corporation, estate or trust, at 0.9 percent of wages received with respect to employment during any taxable year beginning after December 31, 2012, which are in excess of $250,000 on a joint return, half that amount for a married taxpayer filing a separate return, and $200,000 in any other case (26 U.S.C. 3101(b)(2)).

On self-employment income, the charge is imposed on the same class of taxpayers at 0.9 percent of the self-employment income for each taxable year beginning after December 31, 2012, measured against the same three dollar amounts (26 U.S.C. 1401(b)(2)).

Railroad retirement compensation is the third base, and it has no additional-tax paragraph of its own. Section 3201(a) sets the Tier 1 employee tax at an applicable percentage of the compensation received, which it defines as the percentage equal to the sum of the rates of tax in effect under subsections (a) and (b) of section 3101 (26 U.S.C. 3201(a)). The regulation names the resulting charge exactly, as the portion of the tax imposed by section 3201(a) as calculated under section 3101(b)(2) (Treasury Regulation 31.3202-1(g)(1)). There is no standalone railroad paragraph to cite, because the rate reaches the Railroad Retirement Tax Act by cross-reference.

The Self-Employment Threshold Drops by the Wages Already Counted

A taxpayer with both wages and self-employment income does not get the threshold twice. The applicable threshold for self-employment income is reduced, but not below zero, by the amount of wages taken into account in determining Additional Medicare Tax on wages, and that reduction rule does not apply to RRTA compensation (Treasury Regulation 1.1401-1(d)(2)(i)).

Railroad compensation stays on its own track throughout. Medicare wages and self-employment income are combined to decide whether the threshold is passed, a self-employment loss is not counted, and RRTA compensation is compared to the threshold separately (IRS, Instructions for Form 8959).

Say a single filer has Medicare wages below the threshold and self-employment income that on its own would also sit below it, and no employer withheld anything.

Medicare wages, Form W-2 box 5                 160,000
Self-employment income, Schedule SE             95,000

PART I, WAGES
  Wages                                        160,000
  Threshold, single filer                      200,000
  Excess                                             0
  Additional Medicare Tax on wages                   0

PART II, SELF-EMPLOYMENT INCOME
  Threshold, single filer                      200,000
  Less wages already counted                   160,000
  Reduced threshold                             40,000
  Self-employment income                        95,000
  Amount over the reduced threshold             55,000
  0.9% of 55,000                                   495

TOTAL ADDITIONAL MEDICARE TAX                        495

Line order and the threshold reduction per Form 8959 and Treasury Regulation 1.1401-1(d)(2)(i).

Nothing was collected during the year, so the whole amount is settled on the return. Neither figure on its own would have produced a cent of tax, and the liability comes entirely from the reduced threshold.

When an Employer Does Not Collect the Additional Medicare Tax

The employer’s collection duty is narrower than the tax itself. An employer is required to collect the tax imposed by section 3101(b)(2) only to the extent it pays wages to the employee in excess of $200,000 in a calendar year, regardless of the employee’s filing status or other income, and it disregards wages or RRTA compensation paid to the employee’s spouse, any RRTA compensation it pays that employee, and any wages or RRTA compensation paid by another employer (Treasury Regulation 31.3102-4(a)).

To the extent the employer does not collect the tax imposed on the employee by that section, the employee is liable to pay it (Treasury Regulation 31.3102-4(b)).

Where the employer was required to withhold and deducted less than the correct amount, or none of it, the exposure sits on both sides at once. The employer is nevertheless liable for the correct amount of tax it was required to withhold, unless and until the employee pays the tax. If the employee later pays it, the tax is not collected from the employer, and the employer is not relieved of its liability unless it can show that the tax under section 3101(b)(2) has been paid. The employer also remains subject to any applicable penalties or additions to tax resulting from the failure to withhold (Treasury Regulation 31.3102-4(c)).

The railroad side carries the same three rules in its own regulation, written against section 3201(a) as calculated under section 3101(b)(2) (Treasury Regulation 31.3202-1(g)).

What Form 8959 Actually Does

Form 8959 is where the charge is figured and reconciled, and it is attached to Form 1040, 1040-SR, 1040-NR or 1040-SS (IRS, Instructions for Form 8959).

The form runs in five parts, and the order matters. Part I figures the tax on Medicare wages, Part II on self-employment income, and Part III on RRTA compensation, each against the filing-status threshold. Part II is where the reduction above is actually performed, by carrying the Part I wage total down and subtracting it from the threshold before the self-employment income is tested. Part IV adds the three results and sends the total to Schedule 2 (Form 1040), line 11 (Form 8959).

Part V then reconciles what was already withheld, and it gets there by subtraction. Medicare tax withheld, less 1.45 percent of the Medicare wages, leaves the Additional Medicare Tax withholding on wages, which is added to the RRTA withholding from box 14 and carried with federal income tax withholding to Form 1040, line 25c (Form 8959). The Form W-2 boxes that feed those lines are set out in Medicare tax.

Filing is triggered by the form’s own tests, not by whether tax is owed. Medicare wages and tips greater than $200,000 in box 5 of any single Form W-2 require the form, so does RRTA compensation greater than $200,000 in box 14 of any single Form W-2, and so does total Medicare wages and tips plus self-employment income, combined with a spouse’s on a joint return, above the threshold for the filing status (IRS, Instructions for Form 8959).

Common Questions

Two related questions turn on the distinctions above.

Accountably places trained offshore accountants and tax preparers inside US CPA and EA firms, and a firm that wants its Form 8959 reconciliations checked by another set of eyes can run a block of that work through a trial task first.