medicare tax on options is 0.9% or 3.8%?

The exercise income is compensation, not investment income, so it's subject to wage payroll taxes (FICA/Medicare).

Phil Marti VITA/TCE Volunteer Clarksburg, MD

"Phil Marti" wrote

We talked about this in class the other day, and unless your AGI is made up entirely of wages of one employer, how will the employer know to withhold more in Medicare tax? Seems that based on the conversations in class, that the employee/taxpayer will have to tell the employer "I make more than you think, so withhold $x in additional Medicare taxes", or just let it fall to the 1040 in March, or April, or September, or whenever the returns get prepared.

3.8% (the rate for capital gain income). I think because the 10k profit goes on the W-2 it would be 0.9%. ======================Correct. If reportable as wages, it is subject only to the additional 0.9% (which in combination with the medicare taxes already paid, 1.45% + 1.45% + 0.9% = 3.8%) amount.

Nothing to add to the other replies other than to point out that the

3.8% medicare contribution tax applies to net investment income not just "capital gain income". In addition, it applies to the lesser of the net investment income or the amount that AGI exceeds the threshold. See the following for details:

Paul, I think the Medicare tax on wages/salary is the same regardless of total wages or AGI. The new tax is on investment income and is calculated on the return.

Phil Marti VITA/TCE Volunteer Clarksburg, MD

wages or AGI. The new tax is on investment income and is calculated on the return.

And apparently I thought wrong. Sorry.

Getting back to the issue of multiple employers (or self-employment income) that takes the taxpayer over the additional Medicare tax threshold, I imagine this will be handled on the 1040 in sort of a reverse process of the treatment of excess FICA withheld by multiple employers.

Phil Marti VITA/TCE Volunteer Clarksburg, MD

We talked about this in class the other day, and unless your AGI is made up entirely of wages of one employer, how will the employer know to withhold more in Medicare tax? Seems that based on the conversations in class, that the employee/taxpayer will have to tell the employer "I make more than you think, so withhold $x in additional Medicare taxes", or just let it fall to the 1040 in March, or April, or September, or whenever the returns get prepared. ============= Employers won't, just like when two or more employers don't know that Social Security withholding exceeds the annual wage amount. I assume that there will be a new form to handle the additional medicare tax which will flow to the back side of the 1040. Expanding Schedule SE will just confuse people, plus the excess might not be considered an employment tax.

The employer will withhold the .9% based on the employee's W-4. That means an employee could be under-withheld or over-witheld. The employee follows the same rules that exist today for both positions. Here are Ernst & Young's FAQs to employers. It's a pdf file.