However, for self-employed individuals, who are considered both employees and employers, the responsibility falls entirely on them to pay the complete 2.9% tax. <\/strong><\/li>\n<\/ul>\n\n\n\nUnlike some other taxes, which may be applied differently based on your income level, Medicare tax on retirement income is applied uniformly to all taxpayers. Medicare tax has no income limit. This means that regardless of your income level, you will continue to pay Medicare tax on your earned income.
Additional Medicare Tax<\/strong><\/p>\n\n\n\nThere is an additional Medicare tax for high earners, charged under the provisions of the Affordable Care Act (ACA). This applies to individuals whose earned income exceeds specific thresholds.
To determine whether you are subject to the Additional Medicare Tax, you need to be aware of the income thresholds. These thresholds vary based on your filing status, which are given below:<\/strong><\/p>\n\n\n\n\n- $250,000 for married filing jointly:<\/strong>\u00a0If you are married and filing jointly with your spouse, the additional Medicare tax applies if your combined Medicare wages, self-employment income, and railroad retirement compensation exceed $250,000.<\/li>\n\n\n\n
- $125,000 for married filing separately:<\/strong>\u00a0If you are married but choose to file separately from your spouse, the threshold is lower. The additional Medicare tax applies if your individual income from these sources surpasses $125,000.<\/li>\n\n\n\n
- $200,000 for all other taxpayers:<\/strong>\u00a0For all other taxpayers, the threshold stands at $200,000. If your Medicare wages, self-employment income, or railroad retirement compensation exceeds this amount, the additional Medicare tax comes into play.<\/li>\n<\/ul>\n\n\n\n
If you fall into the category subject to the Additional Medicare Tax, your Medicare tax rate becomes 2.35%. However, the additional Medicare tax is applied only to the portion of your income that exceeds the threshold. Suppose your annual income is $225,000. In this case, the first $200,000 is subject to the standard Medicare tax rate of 1.45%, while the remaining $25,000 is subject to the additional Medicare tax rate of 0.9%. It is essential to note that the additional Medicare tax is withheld from an employee’s paycheck, just like the standard Medicare tax. However, there is no employer-paid portion of the additional Medicare tax. This means that if you are subject to the additional tax, you are responsible for paying the complete 0.9%.<\/p>\n\n\n\n
Net Investment Income Tax<\/strong><\/p>\n\n\n\nApart from Medicare and additional Medicare tax, ACA\nintroduced another tax, the Net Investment Income Tax. This is also known as\nthe Unearned Income Medicare Contribution Surtax. NIIT is levied at 3.8% and\napplies to investment income, including dividends, interest, passive income,\nannuities, royalties, capital gains, and regular income that exceeds specific\nthresholds.<\/p>\n\n\n\n
To be subjected to the NIIT, your Modified Adjusted Gross\nIncome (MAGI) needs to exceed $200,000 for single filers or $250,000 for\nmarried couples filing jointly. The NIIT is determined by taking the lower of\nyour net investment income for the year or the amount by which your MAGI\nexceeds the threshold. Essentially, the NIIT can function as either an\nadditional income tax or an extra capital gains tax, depending on your specific\nfinancial situation. If you have net investment income subject to the NIIT, you\ncan report it on IRS Form 8690 when filing your taxes.<\/p>\n\n\n\n
It is important to note that you might be subject to both the additional Medicare tax and the NIIT, but not always on the same types of income. The additional Medicare tax applies explicitly to wages, compensation, and self-employment income exceeding the $200,000 limit. In contrast, the NIIT applies to a broader range of income sources.<\/p>\n\n\n\n