On March 9, 2023, the U.S. Department of the Treasury released the Greenbook (formally known as the General Explanations of the Administration’s Revenue Proposals), to explain the revenue proposals included in Administration’s budget.  One proposal in the Administration’s budget would increase the additional Medicare tax rate by 1.2 percentage points for high-income taxpayers.  

Self-employment earnings and wages are subject to employment taxes under either the Self-Employment Contributions Act (SECA) or the Federal Insurance Contributions Act (FICA). Both SECA and FICA taxes apply at a rate of 12.4 percent for social security tax on self-employment earnings and wages (capped at $160,200 in 2023) and at a rate of 2.9 percent for Medicare tax on all self-employment earnings and wages (not subject to a cap).  In the case of FICA taxes, the employee and employer each pay half of the taxes imposed on wages.

An additional 0.9 percent Medicare tax is imposed on self-employment earnings and wages of high-income taxpayers, above a threshold of $200,000 for single and head of household filers and $250,000 for joint filers.  This tax is paid only by the employee in the case of employed workers, i.e., there is no matching share paid by the employer.  (To simplify the withholding of the additional Medicare tax, employers are generally required to begin withholding at $200,000 of wages without regard to the employee’s filing status.)  This brings the current combined rate of Medicare tax to 3.8 percent for these taxpayers.  

The FICA and SECA Medicare taxes flow into the Hospital Insurance Trust Fund (HITF), which finances Medicare Part A.  According to current projections from the Medicare trustees, the HITF will be exhausted in 2028. Increasing the additional Medicare tax for high-income taxpayers would extend the life of the trust fund.

To address the funding issue facing Medicare, the Administration’s proposal would increase the additional Medicare tax rate by 1.2 percentage points for taxpayers with more than $400,000 of earnings (presumably, without regarding to filing status).  The threshold would be indexed for inflation.  The proposal would be effective for taxable years beginning after December 31, 2022.

This would further disconnect the additional Medicare tax from its root as an employment tax and continue the trend toward its becoming a surtax for higher income taxpayers.  When combined with current-law tax rates, this would bring the marginal Medicare tax rate up to 5 percent for earnings above the threshold.

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Photo of S. Michael Chittenden S. Michael Chittenden

Michael Chittenden practices in the areas of tax and employee benefits with a focus on the Foreign Account Tax Compliance Act (FATCA), information reporting (e.g., Forms 1095, 1096, 1098, 1099, W-2, 1042, and 1042-S) and withholding, payroll taxes, and fringe benefits. Mr. Chittenden…

Michael Chittenden practices in the areas of tax and employee benefits with a focus on the Foreign Account Tax Compliance Act (FATCA), information reporting (e.g., Forms 1095, 1096, 1098, 1099, W-2, 1042, and 1042-S) and withholding, payroll taxes, and fringe benefits. Mr. Chittenden advises companies on their obligations under FATCA and assists in the development of comprehensive FATCA and Chapter 3 (nonresident alien reporting and withholding) compliance programs.

Mr. Chittenden advises large employers on their employment tax obligations, including the special FICA and FUTA rules for nonqualified deferred compensation, the successor employer rules, the voluntary correction of employment tax mistakes, and the abatement of late deposit and information reporting penalties. In addition, he has also advised large insurance companies and employers on the Affordable Care Act reporting requirements in Sections 6055 and 6056, and advised clients on the application of section 6050W (Form 1099-K reporting), including its application to third-party payment networks.

Mr. Chittenden counsels clients on mobile workforce issues including state income tax withholding for mobile employees and expatriate and inpatriate taxation and reporting.

Mr. Chittenden is a frequent commentator on information withholding, payroll taxes, and fringe benefits and regularly gives presentations on the compliance burdens for companies.