IRS Provides Guidance on the New 0.9 Percent Medicare Tax
Two new surtaxes are kicking in on January 1, 2013 for some taxpayers. These taxes have nothing to do with the expiring tax breaks involved in the “fiscal cliff.” The first is a 3.8 percent Medicare tax on net investment income. The second is an additional 0.9 percent Medicare tax on wages and self-employment income. It’s possible for a taxpayer to be subject to both taxes (although not on the same type of income). This article explains how the new 0.9 percent Medicare tax works.
IRS Provides Guidance on the New 0.9 Percent Medicare Tax
The IRS recently issued much-anticipated guidance on the new 0.9 percent Medicare tax on wages and self-employment income. The new tax, which will only affect upper-income individuals, takes effect on January 1, 2013.
Basics on the New Tax
Before 2013, the Medicare tax on salary and net self-employment (SE) income was a flat 2.9 percent.
- If you are an employee, 1.45 percent was withheld from your paychecks, and the other 1.45 percent was paid by your employer.
- If you are self-employed, you paid the whole 2.9 percent Medicare tax yourself as part of the self-employment (SE) tax.
Things have changed. The healthcare legislation (passed in 2010) added an extra 0.9 percent Medicare tax on:
- Salary and/or SE income above $200,000 for unmarried individuals.
- Combined salary and/or net SE income above $250,000 for married joint-filing couples.
- Salary and/or net SE income above $125,000 for married individuals who file separately.
Impact on Employees: If you are a higher-income employee, your employer must withhold the new 0.9 percent Medicare tax from your paychecks, starting in 2013. That will result in a maximum Medicare tax wage withholding rate of 2.35 percent (1.45 percent plus 0.9 percent) for 2013 and beyond. The maximum wage withholding rate for Social Security and Medicare taxes combined will be 8.55 percent (6.2 percent for Social Security plus 2.35 percent for Medicare) for 2013 and beyond.
