Medicare Surtaxes (0.9% tax on wages and 3.8% tax on net investment)

By Tom Douglass 

While the income subject to tax under these new provisions is different, there is an overlap in the definition of taxpayers subject to these new taxes. Both new taxes are designated as Medicare taxes, but none of the funds generated by these provisions are earmarked for Medicare or health care purposes.

 

3.8% Medicare tax on Net Investment Income*

The 3.8% tax on net investment income* applies to unincorporated taxpayers (basically individuals, estates, and certain trusts) who have modified adjusted gross income in excess of these threshold amounts:

·         $250,000 in the case of married taxpayers filing a joint return or a surviving spouse

·         $125,000 in the case of a married taxpayer filing separately

·         $200,000 for everyone else except estates and trusts

This tax is not a payroll tax.

 * Note:  Net investment income as used here includes most dividends, interest, annuities, royalties, rents and the taxable portion of gains from the sale of property. Gains or losses from the disposition of partnership or S Corp interests are generally not subject to this tax, except to the extent the pass-thru entity would have generated gain or loss if it had sold all of its assets immediately before the sale of the pass-thru interest (the deemed sale rule). To the extent that rents and other income are treated as non-passive investment income under Code Sec. 469, they are not treated as net investment income subject to the 3.8% surtax. Qualified plan distributions and any income items subject to self-employment tax are not treated as net investment income subject to this surtax.  Always, consult your tax professional for more information.

 

0.9% Additional Medicare Tax

The 0.9% Additional Medicare Tax applies to individuals at the same threshold amounts, but does not apply to estates or trusts. This is a payroll tax.

 

Neither of these new taxes applies to individuals who are treated as non-resident aliens for U.S. income tax purposes.

 

Self-employed individuals, as well as salaried employees, need to take both of these new taxes into account when determining estimated tax. It should be evident that the rules applicable to these new taxes are extremely complex. We encourage you to meet with your tax advisor to explore ways that the impact of these new taxes.

 

The additional 0.9% Medicare tax on wages and self-employment income is applicable only to income in excess of the threshold amounts discussed above. The threshold and the amount of income subject to tax is based on the combined income of a husband and wife on a joint return.

For payroll purposes the tax applies to the employee’s wages and the employee’s share of the employment tax. Therefore, a single taxpayer with a salary of $300,000 would pay Medicare tax at a rate of 1.45% on the first $200,000 of salary received, but 2.35% (1.45% + 0.9%) on the $100,000 of salary received in excess of the $200,000.

 

Employers are required to withhold additional Medicare tax on wages in excess of $200,000 in a calendar year, without regard to the employee’s filing status or income from other sources. If an employer withholds the Additional Medicare Tax and no Additional Medicare Tax is due – for example, in the case of a married taxpayer who is under the $250,000 married filing jointly threshold but has wages in excess of $200,000 – the employer must withhold the tax and the employee will claim a credit for the withheld taxes on his or her income tax return for the year. If no tax is withheld – for example, if a husband and wife are each paid under $200,000 for the year, but their combined income exceeds the threshold amount – they should either request additional withholding or cover their additional liability for this tax by paying estimated tax.

 

A self-employed person will pay self-employment tax at a rate of 2.9% on self-employment income up to the threshold amount and 3.8% (2.9% + 0.9%) on income in excess of the threshold. These amounts are reduced, but not below zero, by the amount of FICA wages taken into account in determining the Additional Medicare Tax.

 

The AMS Payroll module in 1099-Etc is payroll software that will auto-calculate the payroll portion of this surtax for you without you having to keep track of a person’s year-to-date wages and it will report it for you on quarterly compliance returns.

 

Try our free Demo to see what 1099-Etc can do for you! We offer a complete solution for both live payroll and A-T-F payroll, all the way from entering and printing checks, to generating and printing your quarterly compliance forms. W-2s and 1099s are also generated at the end of the year based on the payroll data entered. There are even options to E-File. Tech Support is provided free of charge Monday thru Friday from 8 AM to 6 PM Central time, with extended hours in January and April.

 

For more information visit our website at 1099-Etc.com.