Soical Security and Medicare Taxes
Federal Insurance Contributions Act (FICA) taxes are deducted from an employee’s paycheck each pay period. Commonly referred to as Social Security taxes, there are actually two separate taxes: the Old-Age, Survivors and Disability Insurance (OASDI) tax and the Medicare Hospital Insurance (HI) tax. For calendar 2014, OASDI applies to the first $117,000 of wages.1 HI is 1.45% of all wages.
Patient Protection and Affordable Care Act
Beginning in 2013, the Patient Protection and Affordable Care Act imposed additional Medicare taxes on certain taxpayers:
0.9% health insurance tax: Taxpayers with incomes above certain thresholds pay an additional HI tax of 0.9%. For an employee, the additional 0.9% effectively increases the HI tax from 1.45% to 2.35% on income in excess of the applicable threshold. For self-employed taxpayers, the additional tax of 0.9% effectively raises the HI tax rate to 3.8% of net self-employment income in excess of the applicable threshold. For self- employed individuals, the additional 0.9% tax is not deductible. The thresholds are $250,000 in case of a joint return (the earnings of both spouses are considered) or a surviving spouse, $125,000 in the case of a married individual filing a separate return, and $200,000 for any other taxpayer.
Unearned income Medicare contribution tax: The legislation also imposed a 3.8% “unearned income” Medicare contribution tax on individuals, estates, and certain trusts. For individuals, the tax is 3.8% of the lesser of net investment income or the excess of modified adjusted gross income over a threshold amount. This threshold is $250,000 in the case of a joint return or a surviving spouse, $125,000 in the case of a married individual filing a separate return, and $200,000 in any other case. In the case of an estate or trust, the tax is 3.8% of the lesser of undistributed net investment income or the excess of adjusted gross income over the dollar amount ($11,950 for 2013 and $12,150 for 2014) at which the highest income tax bracket applicable to an estate or trust begins. Investment income, generally, refers to (1) income from interest, dividends, annuities, royalties and rents; (2) gross income from a business to which the tax applies (such as income from “passive” activities); and (3) the net gain from the disposition of certain property. The term does not include distributions from IRAs and other qualified retirement plans.