Definition
The portion of FICA payroll tax that funds the Medicare Hospital Insurance programme, assessed at 1.45% of all gross wages for both employer and employee, with an additional 0.9% surtax on employee earnings exceeding $200,000.
US Context
Medicare tax is mandatory for all US employers with no exceptions based on employer size. The Additional Medicare Tax has created complexity for payroll processing since its 2013 introduction, as employers must track cumulative earnings to trigger withholding at $200,000 regardless of the employee's actual tax filing status. High-income employees with working spouses may need to adjust their W-4 to account for the interaction between the $200,000 employer threshold and the $250,000 joint filing threshold.
Best Practices
- Begin withholding the Additional Medicare Tax of 0.9% in the pay period when cumulative wages exceed $200,000
- Do not consider the employee's filing status when determining the Additional Medicare Tax withholding trigger
- Report the Additional Medicare Tax withheld in Box 6 of the W-2 along with regular Medicare tax
- Include Medicare tax (employer and employee share) in total employment cost calculations for budgeting
Frequently Asked Questions
Is there a wage cap for Medicare tax?
No. Unlike Social Security tax, Medicare tax applies to all wages without an annual limit. Both the 1.45% employer and employee portions and the 0.9% Additional Medicare Tax (employee only) apply to all eligible compensation.
When does the Additional Medicare Tax kick in?
Employers must begin withholding the 0.9% Additional Medicare Tax when an employee's wages exceed $200,000 in the calendar year, regardless of filing status. The employee may reconcile the final liability on their tax return based on their actual filing threshold.
Do employers match the Additional Medicare Tax?
No. The Additional Medicare Tax of 0.9% is the employee's responsibility only. Employers match only the base Medicare tax rate of 1.45%.