The Internal Revenue Code (IRC) imposes social security and Medicare
taxes on the self-employment income of every individual at the same
combined employer and employee rates applicable under the FICA. The
Affordable Care Act added Code Sec. 1401(b)(2). Code Sec. 1401(b)(2)(A)
increases the Medicare tax on self-employment income for any tax year
beginning after December 31, 2012, by an additional 0.9 percent of
self-employment income that is in excess of certain threshold amounts
previously mentioned.
The proposed regulations describe the
extent to which an individual who has self-employment income is liable
for the additional Medicare tax. Specifically, the proposed regulations
describe how the applicable threshold amounts are reduced (but not below
zero) by the amount of FICA wages taken into account in determining the
additional Medicare tax liability. Thus, the proposed regulations
illustrate the application of the reduced threshold amounts for purposes
of determining liability for the additional Medicare tax attributable
to the individual's self-employment income.
Example: Carl, a
single filer, has $130,000 in wages and $145,000 in self-employment
income. Carl's wages are not in excess of the $200,000 threshold for
single filers, so Carl is not liable for the additional Medicare tax on
these wages. Before calculating the additional Medicare tax on
self-employment income, the $200,000 threshold for single filers is
reduced by Carl's $130,000 in wages, resulting in a reduced
self-employment income threshold of $70,000. Carl is liable to pay the
additional Medicare tax on $75,000 of self-employment income ($145,000
in self-employment income minus the reduced threshold of $70,000).
Example:
Dave and Emily are married and file jointly. Dave has $150,000 in wages
and Emily has $175,000 in self-employment income. Dave's wages are not
in excess of the $250,000 threshold for joint filers, so Dave and Emily
are not liable for additional Medicare tax on Dave's wages. Before
calculating the additional Medicare tax on Emily's self-employment
income, the $250,000 threshold for joint filers is reduced by Dave's
$150,000 in wages resulting in a reduced self-employment income
threshold of $100,000. Dave and Emily are liable to pay the additional
Medicare tax on $75,000 of self-employment income ($175,000 in
self-employment income minus the reduced threshold of $100,000).
Example:
Gina, a head of household filer, has $225,000 in wages and $50,000 in
self-employment income. Gina's employer withheld additional Medicare tax
on $25,000 ($225,000 minus the $200,000 withholding threshold). Gina is
liable to pay the additional Medicare tax on $25,000 of her wages
($225,000 minus the $200,000 threshold for head of household filers).
Before calculating the additional Medicare tax on self-employment
income, the $200,000 threshold for head of household filers is reduced
by Gina's $225,000 in wages to $0 (reduced, but not below zero). Gina is
liable to pay the additional Medicare tax on $50,000 of self-employment
income ($50,000 in self-employment income minus the reduced threshold
of $0). In total, Gina is liable to pay the additional Medicare tax on
$75,000 ($25,000 of her wages and $50,000 of her self-employment
income). The additional Medicare tax withheld by Gina's employer is
applied against all taxes shown on her individual income tax return,
including any additional Medicare tax liability.
The Affordable
Care Act did not provide for a reduction in the self-employment income
threshold amounts by the amount of any RRTA compensation taken into
account in determining liability for the additional Medicare tax. Thus,
an individual who receives both RRTA compensation and self-employment
income does not reduce the self-employment income threshold amounts by
the amount of RRTA compensation taken into account in determining the
additional Medicare tax liability.
Kenneth Hoffman counsels
Entrepreneurs, Professionals and Select Individuals in taking control of
their taxes, and businesses. Discover how I can help you overcome your
tax and business challenges. To start the conversation or to become a
client, call Kenneth Hoffman at (954) 591-8290 Monday - Friday between
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