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Entries in Additional Medicare Tax (1)

Monday
Dec312012

Additional Medicare Tax on High Income Earners

In the prior post I explained the NIIT and the proposed regulations. In this post I will explain the Additional Medicare Tax on earned income above the thresholds given in the chart below. This tax is in effect for tax years starting after December 31, 2012. The proposed regulations (REG-130074-11) are not in effect until after the notice and comment period has ended and final regulations have been published in the Federal Register.

The threshold amounts are nearly identical to the NIIT except Qualifying widower's threshold is $50,000 less for the additional Medicare tax.  This tax is simple, once the taxpayer's income exceeds the threshold for the taxpayer's filing status the additional income is taxed. So for a single who earns $200,001 the additional $1.00 above the $200,000 is taxed.

The rate of the tax is .9%. So on that $1 above the threshold the taxpayer pays an additional 9 cents.

This is an additional tax on the employee's earnings and is not matched by the employer. An interesting bit of addition of the regular Medicare tax rate for the employee and employer's matching plus the employee's additional Medicare tax rate as shown results in a familiar total rate.

 1.45% + 1.45% + .9% = 3.8%

 Shifting income from passive to active (earned) will not shield it from the additional tax.

Employers will be required to start withholding the additional .9% once the taxpayer's gross wages exceed $200,000 regardless of filing status. Employee requests to cease this withholding can not be honored by the employer.

If you have two jobs or have a pass through entity such as a partnership, LLC, or S corp and you anticipate the gross earnings to exceed your filing threshold you can instruct your employers to withhold additional amounts or make estimated tax payments. You will receive credit for the estimated tax payments against the Additional Medicare Tax.

This tax becomes a little more complicated for individuals who have both W-2 income and SE income and is best explained by giving the rules and using an example.

 

  1. Calculate Additional Medicare Tax on any wages exceeding the threshold without regard for to whether any taxes were withheld.
  2. Reduce the applicable threshold in 1 by the total Medicare Wages received but not below zero.
  3. Calculate Additional Medicare Tax on any SE income in excess of the reduced threshold.

Example: Married filers have wages and self-employed income totaling $300,000; husband's wage of $150,000 and wife's self-employed income of $150,000. Individual neither exceeds the $250,000 threshold for MFJ but combined they do. The husband's wages do not exceed the threshold so the couple is not liable for additional taxes on the wages. Next the $250,000 threshold is reduced by the husband's wages of $150,000 lowering the threshold to $100,000. The couple have SE Income subject to the Additional Medicare Tax of $50,000 (wife's SE Income of $150,000 - $100,000 reduced threshold).

 Both new taxes apply to NR Aliens and U.S. taxpayers living abroad. So plan accordingly.

 Remember to make to included this tax in your estimated tax payment calculations to avoid penalties and interest. Since this is a new tax many will forget to include in their estimates.