Understanding the Additional Medicare Tax for High Earners in 2024

Introduction

The Additional Medicare Tax (AMT) is a crucial component of the U.S. tax system that affects high-income earners. Implemented as part of the Affordable Care Act (ACA) in 2013, this tax ensures that individuals with higher earnings contribute more to the Medicare program. Understanding how the AMT works, its thresholds, and your filing requirements is essential to managing your tax liabilities effectively.

Key Takeaways

What is the Additional Medicare Tax?

Medicare is a federal health insurance program consisting of three parts: A (hospital insurance), B (medical insurance), and D (prescription drug coverage). While most people do not pay for Medicare Part A due to taxpayer contributions to the Social Security Administration, employees and employers each pay 1.45% of earnings towards Medicare, and self-employed individuals pay the full 2.9%. However, income above certain thresholds is subject to an additional 0.9% Medicare tax, known as the Additional Medicare Tax.

This tax was introduced under the Affordable Care Act (ACA) to ensure that higher-income earners contribute more towards the funding of Medicare Part A, which primarily covers inpatient hospital care, skilled nursing facility care, hospice care, and some home health care services.

Income Thresholds Subject to Additional Medicare Tax

The income thresholds for the Additional Medicare Tax vary based on the taxpayer’s filing status:

• Single Filers: $200,000
• Married Filing Jointly: $250,000
• Married Filing Separately: $125,000
• Head of Household (with qualifying person): $200,000
• Qualifying Widow(er) with Dependent Child: $200,000

Income above these thresholds is subject to the Additional Medicare Tax of 0.9%.

Withholding Responsibilities

For Employees

Employers are responsible for withholding the Additional Medicare Tax from an employee’s wages once their earnings exceed $200,000 in a calendar year, regardless of the employee’s filing status or combined income with a spouse. This means that the tax is withheld from the paycheck that pushes the employee’s annual earnings over the $200,000 threshold.

However, if an employee has multiple employers and their combined income exceeds the threshold, but each employer withholds the tax only based on their own wages, the total withheld might be less than the actual liability. In such cases, the employee may need to make estimated tax payments or adjust their withholding using Form W-4.

For Self-Employed Individuals

Self-employed individuals must calculate and remit the Additional Medicare Tax themselves when filing their annual tax returns. They should include it in their estimated tax payments throughout the year to ensure compliance and avoid penalties.

Filing Requirements

If your income exceeds the applicable thresholds, you must report and pay the Additional Medicare Tax using Form 8959. This applies to wages, compensation, or self-employment income that surpass the specified thresholds based on your filing status.

Example Calculations

Example 1: Single Filer

Income: $250,000

• Standard Medicare Tax: 1.45% on entire income = $3,625
• Additional Medicare Tax: 0.9% on $50,000 (amount over $200,000) = $450
• Total Medicare Tax: $4,075

Example 2: Married Filing Jointly

Income: $150,000 and $120,000 (total $270,000)

• Standard Medicare Tax: 1.45% on both incomes = $3,625
• Additional Medicare Tax: 0.9% on $20,000 (amount over $250,000) = $180
• Total Medicare Tax: $3,805

Impact and Purpose

The revenue from the Additional Medicare Tax helps fund Medicare Part A, ensuring the financial stability of inpatient hospital care, skilled nursing facilities, hospice care, and certain home health services. This additional funding is crucial, especially considering the growing demands of an aging population.

Frequently Asked Questions (FAQs)

1. When Must Employers Withhold Additional Medicare Tax?

Starting January 1, 2013, employers are required to withhold Additional Medicare Tax from each employee’s wages that exceed $200,000 in a calendar year. This withholding is mandatory regardless of the employee’s filing status or if their combined earnings with a spouse surpass the $250,000 threshold for joint filers.

• Automatic Withholding: Employers must withhold this tax even if the employee’s total income might not require it based on their filing status.
• Credit Towards Tax Liability: Any Additional Medicare Tax withheld is credited against the employee’s overall tax liability on their annual tax return.

2. When Are Individuals Liable for the Additional Medicare Tax?

Individuals are liable for the Additional Medicare Tax when their earnings exceed specific thresholds based on their filing status:

• Married Filing Jointly: $250,000
• Married Filing Separately: $125,000
• Single and Head of Household: $200,000
• Qualifying Widow(er) with Dependent Child: $200,000

This liability applies to wages, compensation, or net earnings from self-employment that exceed these thresholds.

3. How Do Individuals Calculate Additional Medicare Tax if They Have Compensation Subject to RRTA and SECA?

Individuals with both Railroad Retirement Tax Act (RRTA) compensation and Self-Employment Contributions Act (SECA) income must calculate the Additional Medicare Tax separately for each income type. Here’s how:

• Separate Thresholds: RRTA and SECA incomes are assessed against the thresholds based on filing status independently.
• Example: A married couple filing jointly with $160,000 in self-employment income and $140,000 in RRTA compensation does not exceed the $250,000 threshold individually for each income type, thus no Additional Medicare Tax is owed.

4. Are Tips Subject to the Additional Medicare Tax?

Yes, tips are subject to the Additional Medicare Tax if combined with other wages exceed the applicable threshold. Employees must report unreported tips using Form 4137 and calculate any Additional Medicare Tax owed using Form 8959, attaching both to their tax return.

5. Will Individuals Need to Make Estimated Tax Payments for the Additional Medicare Tax?

If individuals anticipate owing Additional Medicare Tax but do not have sufficient withholding to cover the liability, they should make estimated tax payments or adjust their withholding using Form W-4. This ensures they meet their tax obligations and avoid penalties.

6. Can Employees Request Additional Withholding Specifically for Additional Medicare Tax?

No, employees cannot request withholding specifically for the Additional Medicare Tax. However, they can request additional income tax withholding using Form W-4, which will cover all tax liabilities, including the Additional Medicare Tax.

7. When Did the Additional Medicare Tax Start?

The Additional Medicare Tax was introduced in 2013 and applies to wages, compensation, and self-employment income above specified thresholds for taxable years beginning after December 31, 2012.

8. How Are Wages Determined for the $200,000 Withholding Threshold When Using an Employee Leasing Company?

When using an employee leasing company, employers remain responsible for withholding Additional Medicare Tax on wages exceeding $200,000 annually. Employers must monitor wages paid through the leasing company to ensure compliance.

9. Should an Employer Combine Wages Paid on Behalf of an Employer with Other Wages for Withholding Additional Medicare Tax?

No, an employer should not combine wages paid on behalf of another employer with their own wages for withholding the Additional Medicare Tax. Each employer assesses the withholding based solely on the wages they individually pay.

10. How Does a Common Paymaster Determine if Wages Exceed the $200,000 Withholding Threshold?

A common paymaster treats all earnings as if they are paid by one employer. This means aggregating the total wages of an employee from multiple employers to determine if the $200,000 threshold is exceeded, thereby subjecting the excess to Additional Medicare Tax withholding.

11. Should an Employer Combine Wages for Services Performed for Multiple Subsidiaries When Payroll is Through One Subsidiary?

If a subsidiary acts as a common paymaster, the employer should combine wages from all subsidiaries to determine the Additional Medicare Tax liability. Without a common paymaster, wages should remain separate and assessed individually against the threshold.

12. Are Wages from Predecessor and Successor Employers Combined for the $200,000 Withholding Threshold After a Merger or Acquisition?

Yes, in the event of a merger or acquisition, wages paid by both predecessor and successor employers are combined to determine if the $200,000 withholding threshold for Additional Medicare Tax is met within a calendar year.

13. Should Wages Paid by an Employer and a Third Party Be Aggregated to Determine if the $200,000 Withholding Threshold for Sick Pay Has Been Met?

Yes, wages paid by both the employer and any third party must be combined to assess if the $200,000 withholding threshold for Additional Medicare Tax on sick pay has been exceeded.

14. Will an Employer Withhold Additional Medicare Tax on the Entire Payment if a Single Payment Exceeds the $200,000 Threshold?

No, the Additional Medicare Tax is only withheld on the portion of the payment that exceeds the $200,000 threshold within a calendar year. For instance, if an employee has earned $180,000 by November and receives a $50,000 bonus in December, the tax is withheld only on the $30,000 that surpasses $200,000.

15. Will an Employer Withhold Additional Medicare Tax from the Beginning of the Year if an Employee’s Wages Are Expected to Exceed $200,000?

No, employers begin withholding the Additional Medicare Tax only in the pay period when an employee’s actual wages surpass the $200,000 threshold in the calendar year, not from the start of the year based on projections.

16. How Does an Individual Claim a Refund of Additional Medicare Tax on a Wage Repayment to an Employer from a Prior Year?

Individuals must file an amended tax return using Form 1040X, Amended U.S. Individual Income Tax Return, to claim a refund of any overpaid Additional Medicare Tax due to wage repayments.

17. How Do Individuals Report Uncollected Social Security, Medicare, and Additional Medicare Tax if Not Withheld by a Business?

Individuals must file Form 8919, Uncollected Social Security and Medicare Tax on Wages, and Form 8959, Additional Medicare Tax, attaching both to their tax return (Form 1040 or 1040-SR) to report and calculate any taxes owed on unreported income.

18. Do Individuals Need to Identify Estimated Tax Payments Specifically for the Additional Medicare Tax?

No, estimated tax payments are not earmarked specifically for the Additional Medicare Tax. They cover overall tax liabilities, including the AMT.

19. Will Additional Medicare Tax Be Withheld from an Individual’s RRTA Compensation?

Yes, RRTA compensation exceeding $200,000 in a calendar year is subject to the Additional Medicare Tax withholding.

20. Is Remuneration Not Paid in Cash, Such as Fringe Benefits, Subject to the Additional Medicare Tax?

Yes, noncash wages like taxable fringe benefits are subject to the Additional Medicare Tax if the total income, including these benefits, exceeds the applicable thresholds.

21. How Should an Employer Handle Overwithholding of Additional Medicare Tax Discovered in a Subsequent Year?

If an employer discovers overwithholding of Additional Medicare Tax in a subsequent year, they cannot make interest-free adjustments. Instead, the overwithheld amount should be reported on the employee’s Form W-2, allowing the employee to claim the excess on their tax return.

22. How Does an Employer Report Additional Medicare Tax on Form W-2?

Employers report the total Medicare tax (including Additional Medicare Tax) in Box 6 of Form W-2. Railroad employers should report Additional Medicare Tax specifically in Box 14.

23. How Should an Employer Report Additional Medicare Tax on Form 941 or Similar Forms?

On Form 941, Form 941-PR, or Form 941-SS, employers should report wages subject to Additional Medicare Tax on Line 5d. This includes wages paid that exceed the $200,000 withholding threshold for the year.

24. How Should an Employer Handle Withholding Additional Medicare Tax on Noncash Wages Like Taxable Fringe Benefits?

Employers must include the value of taxable noncash fringe benefits in the total wages when calculating Additional Medicare Tax withholding. Once the combined total exceeds $200,000, the additional 0.9% tax must be withheld from the portion exceeding the threshold.

25. Do Employers Need to Combine the Wages of Married Employees to Determine If They Should Withhold Additional Medicare Tax?

No, employers assess each employee’s wages individually for withholding Additional Medicare Tax, regardless of marital status.

26. How Should Employers Treat Repayment of Wages by an Employee for Additional Medicare Tax Purposes?

Employers cannot adjust or claim refunds for overwithheld Additional Medicare Tax due to wage repayments. Instead, employees must file an amended tax return (Form 1040X) to claim any excess tax refunds.

27. Can an Employer File a Claim for Refund for Overwithheld Additional Medicare Tax?

No, employers cannot file a claim for refund of overwithheld Additional Medicare Tax if it was withheld from employee wages. Instead, employees must claim refunds through their tax filings.

28. How Can an Employer Correct Overwithholding of Additional Medicare Tax Discovered in the Same Year?

Employers can correct overwithholding by repaying or reimbursing the employee the excess amount before the end of the calendar year and adjusting their payroll records accordingly using forms like Form 941-X.

29. How Can an Employer Correct Underwithholding of Additional Medicare Tax Discovered in the Same Year?

Employers should promptly adjust the withholding by deducting the correct Additional Medicare Tax from future wages within the same year and report the accurate amount using amended payroll tax forms.

30. How Does an Employer Report Additional Medicare Tax on Group-Term Life Insurance Coverage Provided to a Former Employee?

The imputed cost of group-term life insurance coverage exceeding $50,000 is subject to Social Security, Medicare, and Additional Medicare Tax if combined with other wages surpassing $200,000. Employers must report this on their payroll tax forms, such as Form 941, and ensure the taxes are appropriately accounted for.

31. Should an Employer Stop Withholding Additional Medicare Tax Upon an Employee’s Request if the Employee and Spouse Won’t Meet the Joint Filer Threshold?

No, employers are legally obligated to withhold Additional Medicare Tax on wages exceeding $200,000 regardless of the employee’s filing status or combined income with a spouse.

32. How Does an RDP in a Community Property State Determine the Credit for Additional Medicare Tax Withheld?

Registered Domestic Partners (RDPs) in community property states do not share the credit for Additional Medicare Tax withheld. Each partner claims the credit for their own withholding and estimated tax payments individually.

33. How Does a Registered Domestic Partner (RDP) in a Community Property State Calculate Additional Medicare Tax on Wages and Self-Employment Income?

RDPs must calculate Additional Medicare Tax based on their individual incomes. For self-employment income, half of the total combined self-employment income is considered for each partner’s calculation, ensuring that each partner assesses their own liability without combining incomes for tax purposes.

34. How Do Married Filing Separate Spouses in a Community Property State Determine Their Credit for Additional Medicare Tax Withheld?

Married filing separately spouses in community property states credit the Additional Medicare Tax withheld individually, while income tax withholding credits may be split between partners based on their tax liability.

35. How Does a Married Filing Separate Spouse in a Community Property State Calculate Additional Medicare Tax on Wages and Self-Employment Income?

Each spouse independently calculates the Additional Medicare Tax on their own wages exceeding $125,000 and any self-employment income separately, without considering community property rules for self-employment income.

36. Can Individuals Ask Their Employer to Stop Withholding Additional Medicare Tax if They Won’t Meet the Threshold for Joint Filers?

No, employers must continue withholding Additional Medicare Tax on wages exceeding $200,000 regardless of the employee’s filing status or combined income with a spouse. Any excess withheld can be claimed as a credit on the individual’s tax return.

37. Does an Employer Need to Separate Additional Medicare Tax from Regular Medicare Tax When Making Deposits?

No, employers should combine Additional Medicare Tax with regular Medicare Tax when making deposits. They are reported as a single combined amount in payroll tax deposits.

38. Is an Employer Liable for Additional Medicare Tax if It Does Not Withhold It from an Employee’s Wages?

Yes, employers are liable for Additional Medicare Tax even if they fail to withhold it from an employee’s wages, unless the employee pays the tax themselves. Employers must file Forms 4669 and 4670 to show that the employee has paid the tax to avoid liability.

39. Is an Employer Required to Notify an Employee When Withholding Additional Medicare Tax Begins?

No, employers are not required to notify employees when they begin withholding the Additional Medicare Tax. However, maintaining open communication is beneficial for transparency and trust.

40. Is There an “Employer Match” for Additional Medicare Tax?

No, there is no employer match for the Additional Medicare Tax. Unlike the standard Medicare Tax, which employers match at 1.45%, the Additional Medicare Tax of 0.9% is solely the employee’s responsibility.

41. Do Individuals Need to File Form 8959 if Their Wages and Self-Employment Income or RRTA Compensation Do Not Exceed the Threshold, but Their Employer Withheld the Tax?

Yes, individuals must file Form 8959 even if their income does not exceed the threshold but their employer withheld the Additional Medicare Tax. This allows them to claim a refund for any excess tax withheld.

42. How Does an Employer Report Additional Medicare Tax on Form W-2?

Employers report the total Medicare tax (including Additional Medicare Tax) in Box 6 of Form W-2. For railroad employers, the Additional Medicare Tax is specifically reported in Box 14.

43. How Should an Employer Report Additional Medicare Tax on Form 941 or Similar Forms?

On Form 941, Form 941-PR, or Form 941-SS, employers should report wages subject to Additional Medicare Tax on Line 5d. This includes wages that exceed the $200,000 withholding threshold for the year.

Conclusion

The Additional Medicare Tax plays a vital role in supporting the Medicare program, particularly for higher-income earners. Understanding the thresholds, withholding responsibilities, and filing requirements is essential to ensure compliance and manage your tax liabilities effectively. If you have complex income sources or unique tax situations, consulting with a tax professional can provide personalized guidance tailored to your needs.