The Additional Medicare Tax is owed by higher-income employees, and employers are responsible for withholding this tax and paying it to the Internal Revenue Service (IRS). Learn how to withhold, report, and pay this employment tax.
What Is the Additional Medicare Tax?
Most employees who work in the U.S. must pay Social Security and Medicare taxes on their wages as contributions to their Social Security coverage. The taxes are withheld by their employer. These taxes must also be paid by self-employed individuals in the form of self-employment tax.
The Medicare tax rate is 2.9% of the employee's taxable wages, with 1.45% paid by the employee and 1.45% paid by the employer. The Additional Medicare Tax rate is 0.9% for the employee only. The employer doesn't have to pay this additional tax.
How Does the Additional Medicare Tax Work?
Employers must begin withholding the Additional Medicare tax Rate from an employee's pay beginning with the pay period when the individual's total pay for the year reaches $200,000 and continue withholding this tax from the employee's pay until the end of the year.
All Medicare wages, railroad retirement (RRTA) compensation, and self-employment income subject to the general Medicare tax are subject to the Additional Medicare Tax.
The employee owes the additional tax on pay that exceeds the following threshold amounts, based on filing status.
|Employee Liability for Additional Medicare Tax|
|Filing Status||Additional Medicare Tax due on the year's income above:|
|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|
How To Report Additional Medicare Tax
You must keep records of amounts of the additional Medicare tax withheld from employee pay and that you owe to the IRS as an employer. These amounts must be paid along with all other payroll tax payments.
Reporting on Quarterly Tax Return (Form 941)
The Additional Medicare Tax owed is included in IRS Form 941 (Employer's Quarterly Federal Tax Return). You will need to include it in taxable Medicare wages and tips on Line 5c and in the total amount of taxable wages and tips subject to Additional Medicare Tax withholding (on Line 5d)
Remember, you are withholding the additional Medicare tax beginning at the $200,000 level, but the employee may owe more or less than this amount on their tax return.
Reporting on Employee's W-2
When you prepare W-2 forms to send to employees in January, you should include an explanation of line 5 "Medicare wages and tips." Employees who had the Additional Medicare Tax withheld may have questions about this form and the difference between Medicare wages on this line and the amount withheld for Medicare tax withheld on Line 6.
For example, if you as an employer withheld the Additional Medicare Tax above $200,000, and the employee is married, filing jointly, the employee doesn't have to pay the Additional Medicare Tax until his/her income exceeds $250,000. In this case, the amounts in Line 5 and Line 6 will be different, and the employee may be entitled to a refund of some or all of the amount withheld.
Amount Owed by Employee vs. Amount Withheld
The amount of Medicare withholding may not be the amount an individual must pay, Employers must withhold the 0.9% tax on income over $200,000 for the year, even if the tax withheld is higher or lower than the amount due.
Some employees may have Additional Medicare Tax due in excess of the amount withheld. This additional tax must be paid on the individual's personal income tax return. They may need to pay estimated taxes or change their W-4 form to account for the additional tax due.
If the amount owed by the employee is less than the amount withheld, they may claim a credit on their income tax return, using IRS form 8959.
If an employee's withholding is miscalculated and they are owed a refund, the employee must request the refund directly from the IRS. Don't attempt to give the employee a refund or adjust the employee's withholding on a miscalculation of federal income tax or FICA tax.
Additional Medicare Tax for Self-Employed Individuals
The new Medicare tax also affects self-employed individuals who earn over a specific amount. If you are both an employee and self-employed, all sources of earned income (as opposed to investment income) are combined to reach the levels where the Additional Medicare Tax is applicable. For example, if you earn $150,000 a year at your job, but you earned another $60,000 in a business, you've exceeded the $200,000 threshold and need to pay the Additional Medicare Tax.
There is no regular withholding for self-employment tax, so if you expect that your income might be above the levels above, you may need to increase your estimated tax payments to account for the additional Medicare tax.
Frequently Asked Questions (FAQs)
How is the Additional Medicare Tax calculated?
Here's a simple example of how the Additional Medicare Tax calculations work for an employee who is single and has an annual income of $225,000. The single employee must pay the additional tax on earnings over $200,000 for the year, which is the same as the withholding start amount.
|Total Medicare Tax + Additional Medicare Tax Owed by Employee|
|Employee Owes On||Regular Medicare Tax (1.45%)||Additional Medicare Tax (0.9%)||Total Medicare + Additional Medicare Tax Owed for the Year|
|$225,000 total pay for the year||$3262.50 for all pay||plus $225 on $25,000 amount over $200,000||$3487.50|
The employer owes $3262.50 (1.45% on the full $225,000) for its share of the Medicare tax.
How does Additional Medicare Tax get included on an employee's tax return?
Employees, self-employed individuals, and others must use IRS Form 8959 to calculate their Additional Medicare Tax liability on their individual income tax returns. They should first include the amount of the liability, including wages and tips, then enter their filing status and subtract the amount paid to see if they owe additional tax or if they are eligible for a refund. There's a separate section for self-employment income.
What are taxable Medicare wages and tips?
Some wages and fringe benefits are taxable to the employee for income tax purposes, but some wages may not be taxable to the employee for Social Security and Medicare taxes, including the Additional Medicare Tax. You must exclude the wages not subject to Social Security and Medicare taxes when you calculate the wages subject to the Additional Medicare Tax as you work on payroll.
IRS Publication 15-B Employer's Tax Guide to Fringe Benefits has a list of wages that are exempt from Social Security and Medicare taxes.