The New Medicare Payroll Tax

Find out about this extra 0.9% payroll tax for high income earners.

The tax deal signed into law on January 1, 2013 has brought lots of changes to federal taxes. One of the changes that has received relatively little publicity is an increase in the Medicare payroll tax. Fortunately, the increased tax applies only to higher-income taxpayers.

Medicare is an incredibly expensive program that has its own special tax that must be paid by all employers and employees, and by the self-employed as well. The basic Medicare tax rate is 2.9%. Half of this amount must be paid by employees and half by employers. Employers withhold their employees' Medicare taxes from their paychecks and remit them to the IRS. Self-employed people must pay the entire 2.9% tax themselves, since they have no employer.

Unlike the case with Social Security taxes, there is no ceiling on the Medicare tax--that is, employees must pay it on all their wages and the self-employed on all their net self-employment income, no matter how high.

In order to fund "Obamacare," an additional 0.9% Medicare tax took effect on January 1, 2013. The tax only applies to employees or self-employed taxpayers whose income exceeds certain levels as shown in the chart below:

Filing Status Threshold Amount
Married filing jointly $250,000
Married filing separately $125,000
Single $200,000
Head of household (with qualifying person) $200,000
Qualifying widow(er) with dependent child $200,000

The chart shows that singles and heads of household will owe the surtax once their total earnings exceed $200,000. Couples filing jointly will have to pay the tax when their income exceeds $250,000.

Once a taxpayer's income exceeds the applicable threshold, the effective Medicare tax rate will be 3.8%--the standard 2.9% rate plus an extra 0.9%. The additional tax is only paid on that portion of employee wages or net self-employment income that exceeds the threshold. Moreover, the 0.9% surtax applies only to the employee’s share of Medicare tax. Employers don’t owe it, but they will withhold if from their employees' pay.

For example, if a single employee is paid $300,000 during 2013, the employer will pay a 1.45% Medicare tax on the entire amount out of its own pocket. It will also withhold a 1.45% Medicare tax from the first $200,000 of the employe's wages and a 2.35% tax from the last $100,000 of wages (1.45% regular Medicare tax + .9% surtax = 2.35%).

A self-employed taxpayer with net self-employment income of $300,000 would pay a 2.9% tax on the first $200,000 of this income and a 3.8% on the remaining $100,000. The total Medicare tax would be (2.9% x $200,000= $5,800) + (3.8% x $100,000= $3,800) = $9,600.

Employers must withhold the additional 0.9% tax from all wages over $200,000 they pay to all employees, regardless of their filing status. This is so even if such an employee does not owe the additional tax-- for example, because the employee’s wages together with that of his or her spouse do not exceed the $250,000 threshold for joint return filers. Any withheld additional medicare tax will be credited against the total tax liability shown on the taxpayer's income tax return.

January 2013

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