Medicare tax is the federal hospital insurance tax that funds Medicare, imposed on wages paid for employment and on self-employment income. On wages it is one of the two taxes under the Federal Insurance Contributions Act (FICA), and unlike the Social Security side it has no wage base cap, so every dollar of covered wages carries it. Three Code sections impose it: one on the employee, a matching one on the employer, and a combined one on the self-employed. Two of the three carry a further charge on top, the Additional Medicare Tax, which the individual owes alone above a threshold.
Medicare tax is a federal tax, but it is not federal income tax, because it is measured against wages or self-employment income rather than against taxable income (federal income tax liability). The wage cap on the Social Security side comes from an exclusion that reaches only the taxes imposed by sections 3101(a) and 3111(a) (26 U.S.C. 3121(a)(1)), so it never touches the Medicare side, and the bases that follow from that are worked through in gross wages.
The Three Sections That Impose It
Each section names a different taxpayer, which is why one term can look like several taxes at once.
The employee owes a tax equal to 1.45 percent of the wages received with respect to employment for hospital insurance, plus a further 0.9 percent, the Additional Medicare Tax, on wages above $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)).
The employer owes an excise tax of its own, with respect to having individuals in its employ, equal to 1.45 percent of the wages it pays (26 U.S.C. 3111(b)).
Outside employment, the self-employed owe 2.9 percent of self-employment income for hospital insurance, plus the same 0.9 percent above the same threshold amounts, reduced by any wages already counted against them, and no employer pays a matching share of either part (26 U.S.C. 1401(b)). How each one is collected sits in payroll tax.
All three flow to one fund. Amounts equivalent to 100 per centum of the taxes imposed by sections 3101(b), 3111(b) and 1401(b) are appropriated to the Federal Hospital Insurance Trust Fund (42 U.S.C. 1395i(a)).
The Withholding Trigger and the Filing Threshold Are Set Separately
Two numbers govern the 0.9 percent charge, and they are set independently. An employer must withhold Additional Medicare Tax from wages it pays an individual in excess of $200,000 in a calendar year, without regard to that individual’s filing status or to wages paid by another employer (IRS, Questions and answers for the Additional Medicare Tax).
The taxpayer’s own threshold turns on filing status. It is $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, the status the IRS threshold chart still lists under its former name (IRS, Additional Medicare Tax thresholds by filing status).
On a joint return the two numbers do diverge, and two ordinary situations fall straight out of that gap.
UNDER-WITHHELD, married filing jointly, two employers
Spouse A wages 150,000
Spouse B wages 150,000
Combined wages 300,000
Withheld by either employer 0
Joint threshold 250,000
0.9% owed on 50,000
Additional Medicare Tax due 450
OVER-WITHHELD, married filing jointly, one high earner
Spouse A wages 210,000
Spouse B wages 30,000
Combined wages 240,000
Wages above the 200,000 withholding trigger 10,000
0.9% withheld by the employer 90
Joint threshold 250,000
0.9% actually owed 0Withholding trigger and filing thresholds per IRS, Questions and answers for the Additional Medicare Tax.
Neither case can be fixed by asking the employer to change its Additional Medicare Tax withholding, because an employer cannot stop withholding on request once wages pass the trigger. A taxpayer who sees the under-withheld case coming can make estimated tax payments or request additional income tax withholding on Form W-4, which is applied against all taxes shown on the return, including any Additional Medicare Tax liability. Whatever is left is settled on Form 8959, attached to Form 1040 or 1040-SR. Anyone liable for the tax, or who simply had it withheld, has to file that form, and any amount withheld in excess of the total tax owed is refunded (IRS, Questions and answers for the Additional Medicare Tax).
Where Medicare Tax Shows Up in a Firm’s Work
On the annual side, box 5 of Form W-2 reports Medicare wages and tips, and box 6 reports Medicare tax withheld, with any Additional Medicare Tax withheld reported inside that same box rather than on a line of its own (IRS, General Instructions for Forms W-2 and W-3).
On the quarterly side, Form 941 carries line 5c for taxable Medicare wages and tips, and line 5d for taxable wages and tips subject to Additional Medicare Tax withholding (IRS, Instructions for Form 941).
Medicare Tax Is Not the Net Investment Income Tax
The 3.8 percent tax on net investment income is a separate charge on the lesser of net investment income or the excess of modified adjusted gross income over a threshold amount of $250,000 on a joint return or for a surviving spouse, half that for a married taxpayer filing separately, and $200,000 in any other case (26 U.S.C. 1411).
The two threshold sets look alike, which is a large part of why the charges get confused, but they are not identical: section 1411(b)(1) puts a surviving spouse in the $250,000 tier (26 U.S.C. 1411(b)) and section 3101(b)(2) leaves one in the $200,000 tier that covers any other case (26 U.S.C. 3101(b)(2)).
What separates the two taxes is that the net investment income tax reaches investment income rather than wages or self-employment income, no employer withholds it, and it is not among the hospital insurance taxes appropriated to the Federal Hospital Insurance Trust Fund.
Can Anyone Opt Out of Medicare Tax?
Not by choosing to. The exemptions that exist are statutory and narrow, not something an employee elects on a form. Where an employer and an employee are both members of a recognized religious sect described in section 1402(g)(1), and each has filed and had approved an application for exemption, the employer is exempt from the section 3111 taxes on those wages and the employee is exempt from the section 3101 taxes on them (26 U.S.C. 3127). Wages that a totalization agreement makes subject exclusively to a foreign country’s social security system are also exempt (26 U.S.C. 3101(c)).
Accountably places trained offshore accountants and tax preparers inside US CPA and EA firms, and a firm can run a block of its own payroll and quarterly filing work through a trial task before a client file depends on it.
