Get Ready For The New Medicare Tax Increase on Earned Income
As part Obama-Care put into effect in 2010 is a provision to increase the employee portion of the Medicare tax from the current 1.45% by .9% to a total rate of 2.35%. This new rate only applies on the amount of earned income in excess of $200,000 for single taxpayers and $250,000 for married couples (another example of the “marriage” penalty).
For farmers, earned income applies to any net farm income reported on Schedule F plus any self-employment earnings received as a partner in a partnership (or LLC taxed as a partnership). In addition, the tax applies to wages the farmer earns from his corporation if any plus wages earned off-farm by him and his spouse.
The final calculation is done on the tax return and if the total exceeds the base amount listed previously, the excess is subject to the new Medicare surtax.
Example #1
Farmer Joe earns Schedule F income of $295,000 for 2013 and his spouse earns $120,000 working in town. Their combined income is $415,000. All of this income is subject to the regular employee Medicare rate of 1.45% or 6,017.50. Additional tax of $1,485 is owed on the $165,000 in excess of the base amount.
Example # 2
Jane earns $250,000 working in town. Her employer is required to withhold an extra $450 for the Medicare surtax on the $50,000 in excess of the $200,000 single level (employers withhold based on single floor even if the employee is married). Farmer Joe has a break even year farming and they are entitled to a refund of the $450 withheld from Jane’s wages since combined earned income is exactly $250,000 the married limit.
Note, the employer portion (including the farmer’s self employed portion) remains at 1.45% on all of the earned income. The Surtax only applies to the employee. However, if the employer does not withhold the required Medicare surtax from the employee, they are subject to the liability for the tax.
Paul Neiffer, CPA
Paul Neiffer is a certified public accountant and business advisor specializing in income taxation, accounting services, and succession planning for farmers and agribusiness processors. Paul is a principal with CliftonLarsonAllen in Walla Walla, Washington, as well as a regular speaker at national conferences and contributor at agweb.com. Raised on a farm in central Washington, he has been immersed in the ag industry his entire life, including the last 30 years professionally. Paul and his wife purchase an 180 acre ranch in 2016 and enjoy keeping it full of animals.
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