Heads They Win – Tails You Lose
This is the first year of the new .9% increase in Medicare tax based on earned income being higher than a threshold amount ($200,000 single/$250,000 married). If your wages exceed the threshold amount the extra Medicare tax will be withheld by the employer.
Earned income includes both wages and net earnings from being a self-employed farmer. If you have both wages and farm income, these two numbers are added together to arrive at the total amount of extra Medicare tax owed.
For example, assume a single taxpayer with wages of $300,000 and a net Schedule F income of $150,000. The wages had $900 of extra Medicare tax withheld ($300k-$200k times .9%) and the net schedule F earnings are subject to $1,350 of additional Medicare tax for a total of $2,250.
However, lets assume the taxpayer has a farm loss of $100,000. In this case, we would assume the farmer could net their wages against the $100,000 loss, be below the threshold and get a refund of the extra $900 paid in. This is not the case. The taxpayer still owes the extra tax and gets no refund. This is a case of Heads They Win and Tails We Lose.
If you might be in a situation with high wages and a possible farm loss, you may want to consider taking step to reduce wages and your farm loss (if possible). Many times, the amount of extra Medicare tax owed is not worth the effort, but it is worth taking a look at now while you can still do something about it.
As you may have noticed, we only posted once last week and between now and April 15 our normal 3-5 times a week posting schedule may get reduced. If you have a burning question, please send it to us. We may not respond immediately, but will get back to you as soon as we can.
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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