Additional Medicare Tax: The 0.9% Surtax on High Earners and How It Interacts With SE Tax
The Additional Medicare Tax under IRC 3101(b)(2) (for wages) and IRC 1401(b)(2) (for self-employment income) imposes a 0.9% surtax on earned income above $200,000 (single), $250,000 (MFJ), or $125,000 (MFS). This tax was enacted as part of the Affordable Care Act and is separate from the 3.8% Net Investment Income Tax (NIIT), though both target high earners. The Additional Medicare Tax applies only to earned income (wages and self-employment income), while the NIIT applies only to investment income. Together, they ensure that virtually all forms of income above the threshold bear an additional 3.8% tax. Employers are required to withhold the 0.9% Additional Medicare Tax on wages exceeding $200,000 paid to an individual employee (regardless of filing status), which creates a withholding mismatch for married couples that must be reconciled on Form 8959.
Additional Medicare Tax vs. regular Medicare vs. NIIT:
| Tax | Rate | Applies To | Threshold | Employer Share |
|---|---|---|---|---|
| Regular Medicare (employee) | 1.45% | All wages and SE income | No threshold | 1.45% (employer matches) |
| Additional Medicare Tax | 0.9% | Wages and SE income above threshold | $200K single / $250K MFJ | None (employee only) |
| Net Investment Income Tax | 3.8% | Investment income (if MAGI exceeds threshold) | $200K single / $250K MFJ | N/A |
Thresholds (NOT inflation-adjusted):
| Filing Status | Additional Medicare Tax Threshold | NIIT Threshold |
|---|---|---|
| Single | $200,000 | $200,000 |
| Married filing jointly | $250,000 | $250,000 |
| Married filing separately | $125,000 | $125,000 |
| Head of household | $200,000 | $200,000 |
Withholding vs. liability mismatch:
| Scenario | Withholding Threshold | Tax Liability Threshold |
|---|---|---|
| Single employee, $220K wages | Employer withholds 0.9% on $20K (over $200K) | Tax liability: 0.9% on $20K. Match. |
| MFJ, spouse A earns $150K, spouse B earns $150K | Neither employer withholds (both under $200K) | Tax liability: 0.9% on $50K ($300K - $250K MFJ threshold). Underpayment. |
| MFJ, one spouse earns $250K, other $0 | Employer withholds 0.9% on $50K (over $200K) | Tax liability: 0.9% on $0 (total wages $250K = threshold). Overwithholding. |
How does the Additional Medicare Tax affect business owners?
What strategies can reduce self-employment tax?
The most common approach is electing S-Corp status, which lets you split business income between a reasonable salary (subject to payroll tax) and distributions (not subject to FICA). Maximizing legitimate business deductions reduces net profit and therefore the base for self-employment tax. Contributing to a SEP-IRA or solo 401(k) reduces income tax but does not reduce self-employment tax because the contribution is calculated after SE tax. Hiring your children under age 18 (for a sole proprietorship or spousal partnership) shifts income to them without triggering FICA on their wages. Forming a limited partnership where you are a limited partner can avoid SE tax on partnership income, but the IRS scrutinizes this closely for service businesses.
Start with a Diagnostic: a CPA licensed in the US and Canada reads your file and tells you in writing what's wrong and how to fix it, three to four business days after you finish the questions. The report is $250. If you hire us for any work after that, you get the $250 back as a discount on that work. Or send us your return or your letter and get a fixed price, free.
One or two plain-English guides a week on US-Canada tax. No spam, unsubscribe anytime.
Done. The next guide will land in your inbox.
Yarik Yarosh, CPA. "Additional Medicare Tax: The 0.9% Surtax on High Earners and How It Interacts With SE Tax." Blue Cloud CPA, September 5, 2026. https://bluecloudcpa.com/guides/small-business-additional-medicare-tax-0-9-percent
This guide is general information, not tax advice for your specific situation. Which points apply, and how, depends on your facts.