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 8:30 a.m. to 1:00 p.m. for a no cost consultation, or drop me a note.

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