The Patient Protection and Affordable Care Act (ACA) which imposes greater Medicare taxes on high earners began in 2013. Originally, Medicare taxes for employees were 1.45% regardless of wages earned. Employers were required to match employee contribution at 1.45% for a grand total of 2.9% in Medicare taxes.
Pursuant to the ACA, employees earning over a certain threshold are taxed an additional .9%, while the employer is not required to contribute beyond its original 1.45%. The wage threshold is determined as follows:
- Filing Status=Single; Threshold Amount=$200,000
- Filing Status=Married Filing Jointly; Threshold Amount=$250,000
- Filing Status=Married Filing Separately; Threshold Amount=$125,000
- Filing Status=Head of Household (with qualifying person); Threshold Amount=$200,000
- Filing Status=Qualifying Widow(er) With Dependant Child; Threshold Amount=$200,000
All wages that are currently subject to Medicare Tax are subject to Additional Medicare Tax if they reach the threshold associated with an employee’s filing status.
It should be noted that although the employer is responsible for withholding the additional Medicare tax if the employee reaches the requisite threshold, the employer is not required to notify employees when it begins withholding the additional tax. However, an employer may only withhold Additional Medicare Tax from compensation it pays to an employee in excess of $200,000 (an employer may not take into account spousal income). Therefore, an individual may owe more than the amount his/her employer withholds as a result of the individual’s filing status, additional wages, additional compensation, and self-employment income.
It is also important to note these thresholds are not indexed for inflation, likely making more and more employees subject to this higher tax in the future unless Congress acts to increase the threshold amounts.
Sean Raisch, Summer Associate at the Davis Brown Law Firm and law student at Drake University Law School, Class of 2015.