The Affordable Care Act introduced two new taxes designed to raise revenue for Medicare. The net investment income tax is a 3.8% tax calculated based on the amount of a taxpayer’s net investment income, and is the subject of the companion blog post to this one. The other tax, called the Additional Medicare Tax, is a 0.9% surtax on wages, compensation, and self-employment income above certain thresholds based on filing status. The thresholds are:
– $200,000 for single taxpayers
– $250,000 for married taxpayers filing jointly, and
– $125,000 for married taxpayers filing separately.
The additional 0.9% tax is relatively straight forward. The tax is imposed on every dollar
of self-employment income and wages that exceeds the threshold. For example, Steve is a single taxpayer who earns $265,000 in wages. He exceeds the threshold by $65,000 and therefore will owe Additional Medicare tax of $585 ($65,000 at 0.9%).
Employers will only be required to withhold the additional tax if an individual taxpayer is going to exceed $200,000 in wages. Employees who earn less than $200,000 but who expect to be subject to the Additional Medicare Tax should request additional withholding to avoid having to pay the tax when they file their return.
If you or your spouse are self employed and either receives wages for which there is no withholding of Additional Medicare Tax, the threshold amount for Additional Medicare Tax on self employment income is reduced by the amount of wages for which no tax was withheld. The regulations explain with the following example. Julie runs a painting company and earns $140,000 of self-employment income. Her husband, Chip, earns $130,000 in wages. Since Chip earns less than $200,000, his employer did not withhold Additional Medicare Tax. Chip’s wages will reduce the threshold amount for the couple from $250,000 to $120,000, and the couple will pay the 0.9% surtax on the $20,000 excess of $140,000 over $120,000.
There are a number of techniques available for minimizing the impact of the new Additional Medicare Tax, particularly with respect to self-employed individuals who operate through an S Corporation. Please contact our office so that we can discuss how to find an optimal solution with respect to this new tax.