October 6, 2016
The Affordable Care Act of 2010 implemented a Medicare surtax that went into effect on January 1, 2013. This surtax increased the tax rate from 2.9% to 3.8%. Just about everyone who works in the United States experiences the 2.9% Medicare tax in one way or another. Those who are employed by a business are taxed on wages and those who are self-employed are taxed on business or farming income. Beginning in 2013, and still true in 2017, this Medicare tax rate increased and expanded to include both wage and investment income for those in the higher-income brackets.
The original 2.9% tax rate on salaries, wages, and income from self-employed business owners and farmers is a flat tax across all income brackets. Of this tax, employees are responsible for 1.45% of the tax while employers pay the other 1.45%. There is no limit on the amount of wages that can be subjected to the Medicare tax.
How the Medicare Tax Rate has changed between 2013 and 2017
The 3.8% tax rate targets high-wage earners, who will be responsible for paying the additional 0.9% tax out of their wages. The income threshold is $200,000 for individuals, $250,000 for couples who file jointly, and $125,000 for spouses filing separately.
For example, if an individual filer makes $250,000 a year, he/she will pay the 1.45% Medicare tax on the first $200,000 and the 2.35% (1.45% plus additional 0.9% tax) tax rate on the remaining $50,000. On the other hand, if a couple earning $150,000 each files separately, they will each be responsible only for the 1.45% Medicare tax on their wages.
Additional Medicare Tax withholding applies only to employee compensation in excess of these thresholds in a calendar year. These thresholds are not inflation-adjusted, and thus they apply to more people each year.