8662 / How does a taxpayer calculate additional Medicare tax liability if the taxpayer receives both wage income and self-employment income in the same tax year?

The taxpayer’s combined wages and self-employment income is subject to the additional Medicare tax. This means the tax is imposed on the excess of the taxpayer’s entire amount of earned income over the applicable threshold. The following fact pattern demonstrates the three-step procedure for calculating the tax owed:

Example: Sam is a single taxpayer with $130,000 in wages and $145,000 in self-employment income, or total earned income of $275,000. The applicable threshold for a single taxpayer is $200,000. Step 1 - Calculate additional Medicare tax on wages in excess of the applicable threshold; As mentioned above, the applicable threshold for a single taxpayer is $200,000. How-ever, since Sam’s wages of $130,000 do not exceed the applicable threshold, there is no additional Medicare tax on his wages. Step 2 - Reduce the applicable threshold by the total amount of wages, but not below zero; In this case, the applicable threshold of $200,000 minus Sam’s $130,000 of wages equals a reduced threshold of $70,000. Step 3 - Calculate the additional Medicare tax on any self-employment income received in excess of the reduced threshold. In Step 1, $130,000 of the applicable threshold is absorbed by Sam’s wages. Then, in Step 2, the applicable threshold minus Sam’s wages is reduced to $70,000. Finally, in Step 3, Sam’s self-employment income of $145,000 exceeds the reduced threshold of $70,000 by $75,000, the amount of Sam’s self-employment income subject to the additional Medicare tax. The actual tax is $675 (0.9% * $75,000).