You probably know that the Affordable Care Act authorized an additional Medicare tax of 0.9 percent on the income of highly compensated individuals. You probably have heard that employers are required to withhold this tax from salaries above $200,000. What you may not have heard is that individuals making significantly below $200,000 may owe the tax as well.
While withholding for employers kicks in at $200,000, the threshold amount that you make before the tax is owed depends on your tax filing status. People who file as single owe the added tax on income from all sources above $125,000.
For example, say that you are an engineer who earns $125,000 from your full-time job and you earn an additional $50,000 by doing consulting work on the side. Your total compensation is $175,000, or $50,000 above the threshold. You are well under the $200,000 for your employer to withhold the tax, but you owe the tax on the amount above your tax-filing status threshold.
There are more possible surprises for taxpayers who file as married filing jointly. You owe the tax on all income above $250,000. When you elect this tax filing status, you and your spouse become a single taxpayer entity, so your combined income is what determines whether you owe the additional Medicare tax.
For example, if you earn $175,000 per year, you are significantly under the $200,000 for employer withholding. Say your spouse earns $100,000 per year, also way under the withholding threshold, but your combined income is $275,000. You owe $225 the additional 0.9 percent tax on the $25,000 above the threshold. Not a lot but still probably a surprise.
Another possible surprise is that all your compensation is counted toward the applicable threshold. For example, if you have a full-time job and a part-time job or run a small business on the side, all your compensation from all sources counts toward the taxpayer status threshold.
What are your options for paying this additional Medicare tax?
First, if you earn less than $200,000, you cannot ask your employer to withhold it as a payment to Medicare. You can change your withholding for income tax by providing your employer a new W-4 and asking your employer to increase your federal income tax withholding. You can make estimated tax payments. Or you can wait until you submit your annual taxes and pay it then.
If you have a significant underpayment of the additional Medicare tax, it could be large enough to force you to pay a late-payment penalty and interest.
If you feel you may owe the additional Medicare tax, you should seek advice from competent counsel and have a plan before this tax year ends.