The 0.9% Medicare Surtax Explained

Pinell & Martinez, LLC
October 3, 2014

Many taxpayers have already felt the effect of the 0.9% Medicare tax in 2013. This additional tax was legislated as part of the Patient Protection and Affordable Care Act and amended by the Health Care and Education Reconciliation Act of 2010. It applies to Medicare wages, Railroad Retirement Tax Act (RRTA) compensation, and self-employment income that exceed the following thresholds:

• $125,000, if married filing separately;
• $250,000, if married filing jointly; or
• $200,000, if single, head of household, or qualifying widower.

These threshold amounts are not indexed for inflation, so the tax will trap more taxpayers each year.

All wages subject to the 1.45% Medicare tax and paid in excess of the relevant threshold amount, including taxable noncash fringe benefits and nonqualified deferred compensation, are subject to the additional 0.9% Medicare tax. The impact of the additional Medicare tax increases as the taxpayer’s salary increases because, unlike the Social Security Tax, there is no cap on the amount of compensation subject to the Medicare tax.

Unquestionably, there is an unjust marriage penalty associated with the new tax. For married couples filing a joint return, wages are combined to determine if their income exceeds the threshold amount. For instance, if a single man and a single woman each earned $200,000, then neither would be subject to the additional Medicare tax. However, if they were married, then they would owe an additional $1,350 (0.9% on their earnings over the $250,000 threshold).

Employers are required to withhold additional Medicare tax on wages in excess of $200,000, without regard to the employee’s filing status or income from other sources. The additional Medicare tax will not be matched by employers. If a taxpayer anticipates that he or she may owe more than the amount withheld by their employer, then a taxpayer should make estimated tax payments and/or request additional withholdings using Form W-4.

The rules for the new Medicare Tax are complex, so please refer to the Frequently Asked Questions on the IRS website.

For more information on how the new 0.9% Medicare tax may impact you, please contact Randy Martinez by calling 985.327.7311.