Net Investment Income and Additional Medicare Tax: Everything You Need to Know

Enter the total Medicare tax withheld on your Form W-2 by your employer. If you have unreported tips on Form 4137, Line 6, enter them here. Before completing each line, enter your name as shown on your tax return. Distributions from qualified retirement plans, such as pension plans and IRAs, aren’t subject to the NIIT. However, those distributions may push your AGI over the threshold that would cause other types of income to be subject to the tax. The amounts of Net Investment Income that are included on your Form 1040 by reason of Form 8814 are included in calculating your Net Investment Income.

Whether you’re a self-employed person or working for an employer, the Additional Medicare Tax is an essential part of your financial planning, especially if your income exceeds the threshold. Employers have specific responsibilities regarding the Additional Medicare Tax. Once an employee’s wages exceed $200,000 in a calendar year, the employer must begin withholding the 0.9% surtax, regardless of the employee’s filing status. Calculating the Medicare Tax is relatively straightforward. Once your income exceeds the threshold based on your filing status, the tax applies to the portion of your income that surpasses the threshold. Navigating the world of taxes can be complex, especially when you start dealing with additional taxes like the Additional Medicare Tax 2024.

However, high-income earners may also be subject to the Net Investment Income Tax (NIIT). These thresholds apply to a variety of income types, including wages, self-employment income, other wages, and railroad retirement compensation. If you (and your spouse if filing a joint return) didn’t have Medicare wages, skip Part I and go to Part II. Bob, a single filer, has $220,000 in self-employment income and $0 in wages. Bob is liable for Additional Medicare Tax on $20,000 ($220,000 in self-employment income minus the threshold of $200,000). A 0.9% Additional Medicare Tax applies to your Medicare wages, Railroad Retirement Tax Act (RRTA) compensation, and self-employment income above a threshold amount.

The Federal Insurance Contributions Act (FICA) imposes two taxes on employers, employees and self-employed workers. One is for Old Age, Survivors and Disability Insurance, which is commonly known as the Social Security tax, and the other is for Hospital Insurance, which is commonly known as the Medicare tax. The software does not take into account state local taxes. Federal tax computations only account for adjusted gross income. For withholdings that are exempt from Medicare, you can enter the M1 code on the W/H line to exclude the additional Medicare tax.

• A 0.9% Additional Medicare Tax applies to your Medicare wages, Railroad Retirement Tax Act (RRTA) compensation, and self-employment income above a threshold amount.
• Don is also liable for Additional Medicare Tax on $150,000 of self-employment income ($150,000 in self-employment income minus the reduced threshold of $0).
• The lower your AGI (the number at the bottom of the TAX-FORM 1040) the lower the amount of your income will be subject to the 3.8% surtax.
• However, if the tax credit is allowed only against the tax imposed by chapter 1 of the Code (regular income tax), those credits may not reduce the NIIT.
• The ACA has shaken things up, so stay informed and keep those dollars in check.

How do I complete IRS Form 8959?

Your employer also pays half of the Social Security taxes. If you work for an employer, you pay half of it and your employer pays the other half — 1.45% of your wages each. Include any additional Medicare tax withholding, as reported on Form W-2. If you filed Schedule SE, enter the amount from Part I, Line 6. If you reported a loss, enter ‘0.’ For multiple schedules, enter the total amount.

The NIIT doesn’t apply to wages, unemployment compensation, or income from an active business. Whether you have to pay the Additional Medicare Tax depends on your annual income and your tax filing status. You only owe the additional 0.9% Medicare tax on the money you earn over and above $200,000. In order to arrive at Net Investment Income, Gross Investment Income (items described in items 7-11 above) is reduced by deductions that are properly allocable to items of Gross Investment Income. The Net Investment Income Tax is imposed by section 1411 of the Internal Revenue Code.

Examples of the Calculation of the Net Investment Income Tax

Neither George nor Helen has wages or compensation that exceeds $200,000. Therefore, their employers didn’t withhold Additional Medicare Tax. George and Helen don’t combine their wages and RRTA compensation to determine whether they are in excess of the $250,000 threshold for a joint return.

What investment expenses are deductible in computing NII?

Named the Additional Medicare Tax, it adds an additional 0.9% tax on top of the 1.45% employees have to pay. Employers are not required to match the amount and the employee is responsible for the entire amount of the extra tax. The Act provided a surcharge of 10% on federal corporate income taxes and personal income taxes as a measure to reduce the U.S. budget deficits Additional Medicare Tax and support the funding activity for the Vietnam War.

If I am subject to the Net Investment Income Tax, how will I report and pay the tax?

Both Medicare tax and Additional Medicare Tax withholding are reported together on Form W-2, box 6. If you have both wages and self-employment income, the threshold amount for applying Additional Medicare Tax on the self-employment income is reduced (but not below zero) by the total amount of Medicare wages received. Through employment payroll tax withholdings, Medicare tax funds accumulate in the system for later use.

• If your employer pays you over $200,000 in a year, they must start withholding this tax, even if you file jointly and won’t meet the $250,000 threshold – employers do not take your spouse’s income into account when withholding.
• If your employer doesn’t withhold the tax and you owe it, you are responsible for paying it when you file your tax return.
• However, unlike the standard Medicare tax, employers do not need to provide an employer match for this additional 0.9% tax.
• Most taxpayers won’t complete all parts, but we’ll go through each part in detail.
• Enter your Medicare wages and tips from box 5 of your Form W-2.

What are some common types of income that are not Net Investment Income?

Gain from the sale of a vacation home or other second residence, which doesn’t qualify for the exclusion, is also subject to the NIIT. You may be subject to both taxes, but not on the same type of income. As we approach 2025, changes are coming to the Social Security wage base. The Social Security Administration recently announced that the wage base for computing Social Security tax will increase to $176,100 for 2025 (up from $168,600 for 2024). Wages and self-employment income above this amount aren’t subject to Social Security tax. Whether you’re self-employed or a W-2 employee, understanding your Medicare tax liabilities is crucial for staying compliant and avoiding penalties.

How do I avoid paying 3.8% Medicare surtax?

You can avoid this penalty if you can show that your failure to report tips to your employer was due to reasonable cause and not due to willful neglect. To do so, you can attach a statement to your return explaining why you didn’t report them or submit a statement in response to a notice regarding a proposed penalty assessment. You may be subject to a penalty for failure to make estimated tax payments if you owe Additional Medicare Tax and wait to pay the tax with your tax return. See Form 2210 (or Form 2210-F for farmers and fishers) and its separate instructions to determine if the penalty applies to you.

The amount of RRTA compensation for a railroad employee is reported on Form W-2, box 14. If you have more than one Form W-2, enter the total of the RRTA compensation amounts from box 14 of all Forms W-2. If you are filing a joint return, also include your spouse’s RRTA compensation.

I’m a dad, husband, Certified Financial Planner, tax practitioner, retired Navy veteran, and writer. I love to write articles on financial topics and IRS tax forms. I especially like to explore financial planning subjects that no one else has tackled before, and help people with financial questions they haven’t found the answers to.