Self-Employment Income
The following details pertain to payment of the additional HI SE tax:
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The self-employed taxpayer will be responsible for the additional 0.9% HI tax. And, like an employer, will not be liable for a matching amount.
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The SE tax computation deduction continues to be computed using half the sum of the OASDI tax rate and only the regular HI tax rate (i.e., 7.65%), without regard to the additional 0.9% HI tax. In other words, the 0.9% additional tax is not taken into account for purposes of the SE tax deduction. (Code Sec. 1402(a)(12)(B))
SE Income and Wages
Individuals with wages subject to FICA tax and self-employment income subject to selfemployment tax calculate their liabilities for additional Medicare tax in three steps:
Step 1 - Calculate additional Medicare tax on any wages in excess of the applicable filing status-based threshold, without regard to whether any tax was withheld.
Step 2 - Reduce the applicable threshold for the filing status by the total amount of Medicare wages received, but not below zero
Step 3 - Calculate additional Medicare tax on any self-employment income in excess of the reduced threshold.
Example – Joint Filers: Don and Etta are married and file jointly. Don has $150,000 in wages and Etta has $175,000 in self-employment income.
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1. Don’s wages are not in excess of the $250,000 threshold for joint filers, so they are not liable for additional Medicare tax on Don’s wages.
2. Before calculating the additional Medicare tax on Etta’s self-employment income, the $250,000 threshold for joint filers is reduced by Don’s $150,000 in wages, resulting in a reduced SE income threshold of $100,000.
3. Don and Etta are liable for additional Medicare tax on $75,000 of her self-employment income ($175,000 in self-employment income minus the reduced threshold of $100,000).
SE Income and Railroad Retirement Tax Act (RRTA) Wages
The Affordable Care Act, in which the additional Medicare tax was enacted, 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. Therefore, an individual who receives both RRTA compensation and SE income does not reduce the selfemployment income threshold amounts by the amount of RRTA compensation taken into account in determining the additional Medicare tax liability. (Reg. 1.1401-1(d)(2))
Underpayment of Estimated Tax
A taxpayer cannot request additional withholding specifically for the additional Medicare tax but can request that his or her employer withhold an additional amount of income tax. Estimated tax rules apply to the additional Medicare tax, but the individual need not identify the payments as being specifically for that tax.
California Differences
California has no equivalent tax. It does, however, allow 50% of the self-employment tax to be deducted as an adjustment to gross income, but since the 0.9% additional tax is not computed as part of the SE tax on 1040 Schedule SE, no part of the additional tax is deductible on the California (or federal) return.