Understanding Additional Medicare Tax Basics

If you’re advising high-earning business owners or S-corp/partnership owners, the Additional Medicare Tax (AMT) is a critical component of their total tax picture that often gets overlooked in benefits planning conversations.

The Additional Medicare Tax, enacted as part of the Affordable Care Act in 2013, imposes an extra 0.9% Medicare tax on wages and self-employment income exceeding certain thresholds. For employees, this is withheld by employers. For self-employed individuals, it’s calculated on Schedule SE. Unlike standard Medicare taxes, this additional levy isn’t matched by employers—it’s purely an employee/self-employed burden.

The 2024 income thresholds are: - $200,000 for single filers - $250,000 for married couples filing jointly - $125,000 for married couples filing separately

These thresholds haven’t been indexed for inflation since the tax’s inception, meaning more clients are subject to AMT each year—even without income increases.

Who This Actually Affects

It’s tempting to think AMT only impacts six-figure executives, but the reality is broader. Consider:

S-Corporation Owners: A business owner with $300,000 in net business income might distribute $150,000 in W-2 wages and $150,000 in distributions. That owner pays AMT on the W-2 portion plus self-employment tax on distributions.

Partnership Owners: Similar structure, with guaranteed payments treated as wages for AMT purposes.

High-Earning W-2 Employees: A software engineer earning $220,000 in straight W-2 wages hits this threshold individually—without any business structure considerations.

Dual-Income Households: Two spouses earning $140,000 each combined hit the $250,000 threshold for married filing jointly.

The impact compounds when you layer in investment income, which triggers Net Investment Income Tax (NIIT)—a related but separate 3.8% tax on certain passive income above similar thresholds. These two taxes working together can represent significant wealth reduction.

How Benefits Strategy Intersects with AMT

Here’s where your benefits consulting becomes tax planning:

Health Insurance Contributions

For self-employed individuals, the self-employed health insurance deduction reduces adjusted gross income (AGI) and therefore reduces the income subject to AMT calculations. A business owner paying $18,000 annually for family health insurance can deduct this amount, potentially bringing them below the AMT threshold.

However, health insurance premiums paid through an S-corp as employee compensation do count as wages for AMT purposes—they don’t reduce the threshold, they increase it. This is a critical distinction when structuring W-2 wages.

Section 105 Plans and HRAs

Self-funded health reimbursement arrangements funded by the business can be structured as:

Employer reimbursements (non-taxable to employee, deductible to employer)
Employee out-of-pocket reductions (reduces amount subject to AMT)

A strategically designed plan can provide tax-efficient health coverage while managing AMT exposure.

Cafeteria Plans (Section 125)

Dependent care FSAs and healthcare FSAs allow pre-tax contributions that reduce both income subject to AMT and self-employment taxes. A client saving $5,000 in dependent care through a cafeteria plan just reduced their AMT calculation base by $5,000.

Solo 401(k) Contributions

For self-employed individuals, maximizing solo 401(k) contributions (up to $69,000 in 2024) reduces net self-employment income, which directly impacts AMT calculations. This is one of the most effective levers.

Practical Implications for Your Clients

Wage vs. Distribution Strategy for Business Owners

S-corp owners often ask: “Should I take a lower W-2 wage and higher distributions to minimize payroll taxes?”

The answer changed with AMT. Distributions don’t trigger Medicare taxes, but wages do. However, if your client is already above the AMT threshold, taking distributions instead of wages doesn’t reduce their AMT burden—it just shifts taxes.

The strategy: If income is below the threshold, minimize W-2 wages. If above the threshold, optimize for total tax burden considering federal income tax, self-employment tax, and AMT together, not in isolation.

Timing Considerations

Some high earners can strategically time income recognition or defer bonuses to manage AMT exposure. While this requires careful planning with a CPA, it’s worth exploring for clients with variable income.

State-Level Impacts

Some states (California, Connecticut, New Jersey, New York) have their own additional Medicare taxes on top of the federal version. Clients in these states face compounded burden—sometimes 1.45% state plus 0.9% federal on income above thresholds.

Action Steps for Benefits Advisors

1. Ask the right questions during client discovery: - “What was your total household income last year?” - “How is your business structured?” - “What portion of your income comes from investments?”

2. Coordinate with the client’s CPA, not in competition. Share relevant information about potential benefits strategies that might reduce taxable income.

3. Model scenarios showing how different benefits structures affect tax burden. Most benefits platforms allow this analysis.

4. Document the strategy in writing so both you and the CPA have clarity on what’s planned.

5. Review annually, since thresholds and circumstances change.

Common Misconceptions

“Benefits don’t matter once you’re over the threshold.” False. Every dollar reduced through legitimate tax planning strategies saves 0.9% in AMT, plus standard income tax rates (24-37% federal range), plus potential state taxes and NIIT.

“This only affects self-employed people.” False. W-2 employees are equally subject to AMT.

“We can’t do anything about this—it’s mandatory.” False. Proactive planning around income recognition, business structure, benefits design, and retirement contributions all influence AMT exposure.

Conclusion

Additional Medicare Tax represents a significant and often-overlooked cost for high-earning clients. By understanding how it intersects with benefits design—particularly around self-employment structure, health coverage, and retirement contributions—you position yourself as a more valuable advisor.

The most successful benefits consultants in 2024 aren’t just selling insurance—they’re helping high-earning business owners optimize their total tax and benefits picture. That requires understanding AMT and coordinating with tax professionals.

Your clients will notice the difference.

Nexus Benefit Solutions is an independent employee benefits advisory firm based in West Michigan. Questions? Reach out at jason@nexusbenefitsolutions.com or call 616-425-9740.

Additional Medicare Tax: Implications for High-Earning Clients