Additional Medicare Tax

The Additional Medicare Tax is a 0.9 percent federal tax on wages, railroad retirement compensation and self-employment income above a fixed threshold, added by Internal Revenue Code section 3101(b)(2) for wages and section 1401(b)(2) for self-employment income. It is charged on the employee or the self-employed person alone; unlike the underlying Medicare tax, no employer pays a matching half. The threshold is $250,000 for a joint return and $200,000 in any other case, with married filing separately set by statute at half the joint amount, which is $125,000.

"Additional Medicare Tax" is the official name, not a nickname. It is the title of Form 8959, the form the IRS uses to compute it. Two other names get attached to it in conversation and both cause trouble. It is not the "Medicare surtax," a label also used for the net investment income tax, which is a different 3.8 percent tax on investment income rather than on earnings. And it is not part of the regular Medicare tax, which continues at 1.45 percent on every dollar underneath and alongside it.

The thresholds do not move, and that is the most consequential fact about this tax. Section 3101(b)(2) has said $250,000 and $200,000 since the tax took effect for tax years beginning after December 31, 2012, and the section contains no inflation-adjustment provision. Wages have risen substantially since then and the thresholds have not, so each year the surtax reaches earnings that would have been below the line in an earlier year. Anyone planning around it should treat the thresholds as fixed points that the rest of the tax system drifts past.

What is taxed is measured separately by category. Form 8959 has one part for Medicare wages, one for self-employment income and one for railroad retirement compensation. The wage and self-employment parts are coordinated: section 1401(b)(2)(B) reduces the threshold available against self-employment income by the wages already counted, so a person with both does not get to use the threshold twice. Within the self-employment part, a loss is entered as zero rather than netted against wages.

The withholding rule and the liability rule are different rules, and they were written that way on purpose. Section 3102(f)(1) tells an employer to withhold the 0.9 percent only on wages it pays above $200,000, and expressly permits it to disregard the wages of the employee's spouse. An employer has no way to know a worker's filing status or a spouse's pay, so the statute gives it a single number to work from. The consequence is that the amount withheld and the amount owed are two different figures for a large share of the people affected, in both directions. Section 3102(f)(2) closes the gap in the government's favor: to the extent the employer does not collect the tax, the employee pays it.

It buys nothing and is deducted nowhere. The 0.9 percent adds to no benefit. Social Security retirement benefits are computed only from covered earnings up to the annual wage base, and Medicare Part A pays the same hospital benefit whatever a worker earned, so nothing in either program's benefit formula responds to the surtax. And section 164(f)(1), which lets a self-employed person deduct half of their self-employment tax, expressly excludes "the taxes imposed by section 1401(b)(2)." So a self-employed person gets no deduction for any part of the surtax, while still deducting half of the ordinary self-employment tax underneath it.

During the year, an employer watches a single number: cumulative wages paid to that employee. Once they exceed $200,000, it withholds an extra 0.9 percent on everything above that point, alongside the regular 1.45 percent Medicare tax. At filing, the taxpayer completes Form 8959. Part I applies the correct threshold for their actual filing status to their total Medicare wages, Part II does the same for self-employment income after reducing the threshold by those wages, and Part IV carries the total to Schedule 2 of Form 1040. Part V then works out how much Additional Medicare Tax was actually withheld, by subtracting 1.45 percent of Medicare wages from the total Medicare tax withheld in box 6 of Form W-2, and adds that amount to federal income tax withholding on Form 1040. Over-withholding therefore comes back in the refund rather than being lost.

A hypothetical example where too little is withheld. Rafael is single and holds two jobs, each paying $140,000. Neither employer pays him more than $200,000, so neither withholds a cent of Additional Medicare Tax. His wages total $280,000, which is $80,000 above his $200,000 threshold, so he owes 0.9 percent of $80,000, or $720. Nothing was withheld against it, so the whole $720 is a balance due unless he raised his income tax withholding or made an estimated payment during the year.

A hypothetical example where too much is withheld. Wen and Marisol file jointly. Wen earns $265,000 from one employer and Marisol has no wages. The employer must withhold on the $65,000 above $200,000, so it withholds 0.9 percent of $65,000, which is $585. Their actual liability uses the joint threshold: $265,000 minus $250,000 is $15,000, and 0.9 percent of that is $135. The $450 difference is not lost. Form 8959 Part V reports it as withholding, and it reduces their balance due or increases their refund.

This is a tax rather than a choice, so what follows is what to watch rather than a case for or against.

What works in a taxpayer's favor

• It applies only to earnings above the threshold, never to the whole amount, so crossing the line by a small margin costs a small amount.
• Over-withholding is fully recoverable through Form 8959 rather than being stranded, unlike over-withheld Social Security tax from a single employer.
• Because it is a flat rate above a fixed line, the exposure is easy to estimate in advance from a pay stub and a spouse's pay.

What catches people out

• The commonest surprise is a two-earner couple whose incomes each sit below $200,000 but whose combined wages exceed $250,000. Nothing is withheld and the entire tax appears at filing.
• A married-filing-separately taxpayer faces a $125,000 threshold while the employer still withholds only above $200,000, so under-withholding is close to automatic.
• Someone with both wages and self-employment income cannot use the threshold twice, and the self-employment side has no withholding to soften it.
• There is no deduction for it, and no employer match, so the full 0.9 percent is a direct cost to the earner.
• A late-year bonus or a stock vesting can push wages past the line after the point where withholding could be adjusted comfortably.