Just when you thought things couldn't get more confusing, along comes an additional tax as part of the Affordable Care Act (Obamacare) to affect you as a business owner or self-employed individual.
The Affordable Care Act imposes an additional level of Medicare tax, starting with 2013 income, and includes unearned income (income from investments, dividends, capital gains, and other types of passive income).
The basic Medicare Tax (part of self-employment tax) is 2.9%; the increased tax is 3.8% on your total income including wages from employment, self-employment income, and unearned income, above a threshold:
- $250,000 for married filing joint filers and qualifying widows or widowers;
- $200,000 for single and head of household filers; and
- $125,000 for married filing separately filers.
Since self-employment tax is not withheld, you'll need to speak to your tax advisor to increase your estimated tax payments.
Of course, there's lots more detail than this. William Perez, Guide to Tax Planning, has an excellent article that explains Medicare Tax and Unearned Income; his article includes a calculation to show how the increased Medicare Tax might work, and some tax planning strategies for minimizing Medicare taxes.
Also, in case you missed it, don't forget that you must increase withholding for Medicare tax from higher-income employees starting January 1, 2013 by .9%, to account for this increased tax. Read more details on how the increased Medicare tax affects your payroll accounting.