Find Out if Your Wages and Deferred Compensation Payouts are Subject to the .9% Medicare Surtax

An additional Medicare surtax was implemented in 2013 which imposes an extra .9% tax on wages, compensation, deferred compensation payouts, and self-employment income that exceed the following amounts:

Filing Status Threshold Amount
Married filing jointly $250,000
Married filing separate $125,000
Single $200,000
Head of household (with qualifying person) $200,000
Qualifying widow(er) with dependent child $200,000

Wages that are currently subject to Medicare tax and paid in excess of the threshold for an individual’s filing status will also be subject to the additional Medicare surtax. Employers generally begin to withhold the additional Medicare tax once a taxpayer’s income exceeds $200,000.  A deferred compensation payout is subject to the Medicare surtax, but the timing of when the tax needs to be paid is determined by whether it is a qualified or non-qualified plan.

Qualified deferred compensation plans include 401(k), 403(b), and 457(b) plans. These plans offer tax advantages to employers and employees. Wages received through a qualified deferred compensation plan are not subject to income tax withholding, but they are subject to social security and Medicare tax withholding. A qualified deferred compensation plan’s contributions are subject to Medicare tax and the additional Medicare tax when the wages are earned.

Non-qualified deferred compensation plans, such as stock option agreements, pay taxes on deferred compensation at the time compensation is eligible to be received based on a special timing rule (Regs. Sec. 31.3121(v)(2)-1(a)(2)). Under this rule, deferred compensation is subject to taxes when services have been performed creating the right to that amount, OR when the amount is not subject to any substantial risk of forfeiture, whichever date is LATER.

Being aware of how deferred compensation is taxed allows taxpayers to properly plan for retirement. If you have any questions on the nuances of the Medicare surtax, or if you would like to discuss tax planning associated with deferred compensation plans, please contact an Anders advisor.