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Entries in Medicare Tax (2)

Tuesday
May162017

Form 8959 Additional Medicare Tax

Several clients have asked me this year, “What is this tax from Form 8959 on my 1040.” And I spend several minutes on the phone or writing a letter to the client explaining the form, the tax, and how it is calculated. The tax is Additional Medicare Tax authorized under the American Care Act (ObamaCare) and is assessed on all income subject to Medicare tax; wages, tips, self-employment income, basically all earned income. Passive income (interest and dividends) is not subject to this tax. Non-cash wages; i.e. fringe benefits, are subject to this tax. Example, taxpayers who receive the use of a vehicle for work and are taxed on the personal use of the vehicle (reported on their W-2). The personal use is subject to this tax if total gross income exceeds the threshold.

An individual is liable for Additional Medicare Tax when the individual’s wages, compensation, or self-employment income (together with that of his or her spouse if filing a joint return) exceed the threshold amount for the individual’s filing status:

Filing Status

Threshold

Married Filing Jointly (MFJ)

$250,000

Married Filing Separately (MFS)

  125,000

Single

  200,000

Head of Household(with qualifying person)

  200,000

Qualifying Widow(er) with dependent child

  200,000

 

There are no exceptions for resident aliens or U.S. Citizens living abroad, they are subject to the tax even if over sea’s income is excluded from income tax.

Employers must withhold the tax from wages when an individual in their employ has earned income in excess of $200,000 in a calendar year without considering the individuals filing status or wages paid by another employer. And individuals who are self-employed or are employed by two or more employers and whose wages will not exceed the threshold from anyone employer but in total will exceed the threshold; should make estimated tax payments for the Additional Medicare Tax. The threshold amount for this purpose is $200,000. However the taxpayer cannot request the employer withhold additional funds specifically for this tax. But the employee may request additional withholding for income taxes which will be available on Form 1040 to apply to the tax there.

The additional tax is included in the total Medicare tax withheld from the employee’s wages for reporting purposes and is included in the Medicare number of Box 6 on the W-2.

The tax rate is 0.9% (.009) on income in excess of the threshold so for a couple filing MFJ with gross taxable income of $300,000 the tax 0.9% of $50,000 or $450.00. An individual filing single with gross income of $300,000 the tax is $900.

Calculating the tax is a three step process:

1.)    Calculate Additional Medicare Tax on any wages in excess of the applicable threshold for the filing status, without regard to whether any tax was withheld.

2.)    Reduce the applicable threshold for the filing status by the total amount of Medicare wages received, but not below zero.

3.)    Calculate Additional Medicare Tax on any self-employment income in excess of the reduced threshold.

An example is a single filer (C), has $130,000 in wages and $145,000 in self-employment income. C’s wages are not in excess of the $200,000 threshold for single filers, so C is not liable for Additional Medicare Tax on these wages. Before calculating the Additional Medicare Tax on self-employment income, the $200,000 threshold for single filers is reduced by C’s $130,000 in wages, resulting in a reduced self-employment income threshold of $70,000. C is liable to pay Additional Medicare Tax on $75,000 of self-employment income ($145,000 in self-employment income minus the reduced threshold of $70,000).

The method is the same for other filing statuses with the threshold increasing or decreasing depending on the filing status as shown in the above table.

The additional tax withheld is included in box 6 of the W-2; Medicare tax withheld and is added to the income tax withholding amount from box 2 of the W-2 when reported on Form 1040. The tax is calculated again using total income on Form 8959. The tax amount is shown on Form 1040 under the Taxes section increasing the filer’s tax liability and the tax paid through withholding paying the tax.

I end with this is a tax intended to fund Medicare services and ObamaCare with a tax on high income filers and is a separate tax on previously taxed income; essentially double taxation of income. A rare occurrence in American taxation as it has been policy to avoid double taxation. Will this tax be rescinded under the changes proposed by the Trump administration has yet to be seen? Typically taxes once enacted stay even when the purpose they were enacted for have long since past.

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.