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Form 8959, Additional Medicare Tax - a comprehensive guide

Form 8959, Additional Medicare Tax - a comprehensive guide

Did you know that you owe IRS additional medicare tax (AMT) at the rate of 0.9% on your earned income and need to file Form 8959 if your medicare wages, net self-employment income & RATA compensation exceed a certain threshold?

This article contains comprehensive guidelines on:

  • what is AMT,
  • who files it &
  • how it is computed.

What is the additional medicare tax, Form 8959?

Additional medicare tax is one of the two medicare surtaxes that were introduced under the Affordable Care Act (ACA) in the year 2013 to fund the medicare expansion. This surtax is applicable to high earners and there are specific incomes subject to it. When your earnings cross the threshold specified by the IRS you will have to pay the AMT at the rate of 0.9%.

If you are a well-paid worker or running a lucrative business you will likely have to pay AMT to the IRS and file Form 8959 to compute the amount you owe and report the amount withheld by your employers.

Do you need to file Form 8959?

You need to file Form 8959 if either one of the following exceeds a certain limit.

Medicare wages

The standard rate for regular medicare tax is 2.9%. If you are employed then this rate is divided equally between you and your employer. This means that your employer will withhold the medicare taxes at the rate of 1.45% from your salary & contribute the remaining half.

However, for AMT there is no employer-paid portion. You will pay 2.35% (1.45% + 0.9%) AMT on your excess income.

Self-employed income

If you are self-employed you will be responsible for paying your regular medicare taxes & AMT at the rate of 2.9% and 0.9% respectively. You will owe 3.8% AMT on income beyond the threshold.

Railroad Retirement Tax Act (RRTA) compensation

You are liable to pay an additional 0.9% AMT on your RRTA compensation which exceeds the specified limit.

How is the additional medicare tax calculated?

So, you already know how to calculate medicare taxes but to find out whether or not you owe additional medicare surcharge you need to look at the threshold, which is the limit specified by the IRS, above which your income is subject to this tax.

According to the IRS instructions for Form 8959:

Medicare wages and self-employment income are combined to determine if your income exceeds the threshold. A self-employment loss shouldn't be considered for purposes of this tax. RRTA compensation should be separately compared to the threshold.”

The table below shows the predetermined income level above which AMT is applicable:

Filer Threshold
Single $200,000 & above
Married filing jointly $250,000 & above
Married Filing Separately $125,000 & above
Head of Household $200,000 & above
Qualifying widower with
a dependent child
$200,000 & above

 

How much is medicare tax and what is the applicable threshold will vary from person to person. Your medicare tax liability will depend on the following:

  • Earnings
  • Marital status
  • Source of income

Let’s say you are single, employed, and earning $275,000. First, you are going to look at the relevant threshold limit. In this case, it is $200,000. So you owe the AMT on the $75,0000.

Here is how you are going to calculate your total medicare tax including AMT:

  1. Regular Medicare Tax @ standard rate = $200,000 * 1.45% = $2900

  2. Income beyond threshold @ AMT rate = $75,000 * 2.35% = $1762

  3. Total regular medicare tax & AMT = $4662

Your employer is required to withhold medicare employee taxes from your salary and remit it to the IRS along with the employer portion.

But when should employers begin to withhold AMT?

The IRS requires employers to withhold AMT in the pay period when the wages or RATA compensation paid to an employee for the year exceeds $200,000. They can continue withholding it until the end of the tax year. There is no matching-up contribution from the employer.

Examples of additional medicare tax

1. Johnny – single filer

Johnny works two jobs and earns $65,000 from one job and $175,000 from the second job. His total earnings for the calendar year are $240,000. Johnny is liable to pay additional medicare taxes on the amount in excess of $200,000 which is $40,000. His AMT will be $360.

2. Francis & Johnny – married filing separately

Francis and Johnny are married but file their tax returns separately. Francis’ medicare wage for the year is $175,000 and Johnny's wage for the calendar year is $95,000, Johnny’s income is not subject to AMT as it is below the threshold level of $125,000. However, Francis is liable to pay the AMT on $50,000 as it exceeded the specified limit. Francis owes $450 AMT to the IRS.

3. Francis & Johnny – married filing jointly

Let’s suppose Francis and Johnny decided to submit joint tax returns. Continuing from the above example their combined wages are $270,000. So they owe AMT on $30,000 which comes out to be $270.

It is important to note that as a rule, the IRS requires employers to withhold AMT when the employees' income exceeds $200,000.

In the above examples, Johnny as a single person works two jobs so crossed the threshold for none of the employers. And Francis’ income didn’t exceed the $200,000 limit specified for the employer but her personal threshold as a married and separate filer is exceeded.

To resolve this they need to request additional income tax withholding using Form W-4. If they didn’t then they will be required to make estimated tax payments.

How to work through Form 8959

Form 8959 helps you to compute how much additional medicare tax you owe to the IRS and if you are employed how much is withheld by your employer. This form consists of 3 main parts.

  • Part I, AMT on Medicare Wages: Fill this section if you and your spouse if filing jointly have a medicare wage.

  • Part II, AMT on Self-employment Income: This part is relevant to those individuals who are self-employed.

  • Part III, AMT on RRTA compensation: You can skip this section if you didn’t receive RRTA compensation.

Form 8959 preview

 

 

Once you figure out your total AMT liability you will have the final section to do the withholding reconciliation where you will figure out how much your employer has withheld from your Medicare wages and RRTA compensation.

Finally, you will figure out if you have under or over overpaid the AMT and can arrange to request a refund or pay the additional tax.

FAQ

1. Are Nonresident Aliens and U.S. citizens living abroad subject to Additional Medicare Tax?

Yes, if you are a non-resident alien or a U.S. citizen residing in a foreign country, your employment, self-employment income, and other compensation may be subject to the Additional Medicare Tax if it exceeds the applicable threshold.

2. Are there special rules for Medicare Tax if living abroad?

No, the IRS doesn’t have any special rules for those living abroad. Regular Medicare tax applies, and the Additional Medicare Tax is levied if your wage, compensation, or self-employment income exceeds the specified limit. For married individuals filing jointly, the combined threshold applies.

3. What wages are subject to Additional Medicare Tax?

Non-cash wages, including noncash fringe benefits, are subject to Medicare tax and the Additional Medicare Tax if they exceed the applicable threshold. This includes Medicare wages, tips, and net self-employment income combined.

4. Will I also owe net investment income tax on income subject to Additional Medicare Tax?

No. The net investment income tax, imposed by section 1411 at a rate of 3.8%, applies to net investment income and not to wages, self-employment income, or RRTA compensation. Thus, if your income is of these types, you do not owe net investment income tax on it.

Ines Zemelman, EA
Founder of TFX