A new Medicare tax kicked in back in 2013. There is a lot of confusion, so here are some IRS guidelines that can help in tax planning:
1. The Additional Medicare Tax is 0.9 percent. It applies to the amount of your wages, self-employment income and railroad retirement (RRTA) compensation that is more than a threshold amount. The threshold amount that applies to you is based on your filing status. If you’re married and file a joint return, you must combine your spouse’s wages, compensation, or self-employment income with yours to determine if you exceed the “married filing jointly” threshold.
2. The threshold amounts are:
Filing Status Threshold Amount
Married filing jointly $250,000
Married filing separately $125,000
Single $200,000
Head of household $200,000
Qualifying widow(er) with dependent child $200,000
3. You must combine wages and self-employment income to determine if your income exceeds the threshold. You do not consider a loss from self-employment when you figure this tax. You must compare RRTA compensation separately to the threshold. See the instructions for Form 8959, Additional Medicare Tax, for examples.
4. Employers must withhold this tax from your wages or compensation when they pay you more than $200,000 in a calendar year, without regard to your filing status, wages paid to you by another employer, or income that you may have from other sources. Your employer does not combine the wages for married couples to determine whether to withhold Additional Medicare Tax.
5. You may owe more tax than the amount withheld, depending on your filing status and other income. In that case, you should make estimated tax payments /or request additional income tax withholding using Form W-4, Employee’s Withholding Allowance Certificate. If you had too little tax withheld, or did not pay enough estimated tax, you may owe an estimated tax penalty. For more on this topic, see Publication 505, Tax Withholding and Estimated Tax.
6. If you owe this tax, file Form 8959, with your tax return. You also report any Additional Medicare Tax withheld by your employer on Form 8959.
Your tax preparer will compute this on your tax return, but the real risk is not paying enough estimated taxes during the year. You should have a proper tax projection prepared early in the tax year to know whether you are subject to such tax.
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