Biden Medicare Tax Changes 2026: What High Earners Must Know
Last updated: January 31, 2026
Biden Medicare tax changes remain a key concern for high-earning business owners, professionals, and self-employed individuals. As we move through the 2026 tax year, it is crucial to understand how the Additional Medicare Tax and Net Investment Income Tax affect your bottom line—and what you can do to control your exposure.
Quick Answer: High earners above $200,000 (single) or $250,000 (married filing jointly) face an additional 0.9% Medicare tax on earned income and a 3.8% Net Investment Income Tax on investment gains. These thresholds have not been adjusted for inflation since 2013, meaning more taxpayers are affected each year. Strategic planning—including S-Corp structuring, retirement contributions, and income timing—can meaningfully reduce your total exposure.
Key Takeaways
The Additional Medicare Tax is a 0.9% surtax on earned income above set thresholds—for 2026, these remain $200,000 (single) and $250,000 (married filing jointly).
Net Investment Income Tax (NIIT) of 3.8% applies to investment income above these same thresholds, including capital gains, dividends, rental income, and interest.
Optimizing your business structure, timing income, and maximizing deductions are strategic ways to reduce your Medicare tax burden.
Incorrect withholding can lead to underpayment penalties—accurate calculation and quarterly payments are more important than ever.
Real estate investors face unique NIIT exposure that requires careful planning around passive vs. active participation rules.
What Is the Additional Medicare Tax?
The Additional Medicare Tax, implemented in 2013 under the Affordable Care Act, requires high earners to pay an extra 0.9% tax on wages, compensation, and self-employment income exceeding IRS thresholds. Unlike the standard 1.45% Medicare tax (with employers matching another 1.45%), this surtax falls entirely on the employee or self-employed individual.
2026 Thresholds:
Single: $200,000
Married Filing Jointly: $250,000
Married Filing Separately: $125,000
This tax is in addition to the standard 2.9% Medicare tax and is not adjusted for inflation, so its impact grows each year as incomes rise. Over a decade later, wage growth has pushed significantly more taxpayers above these fixed thresholds.
Why the Extra Medicare Tax Matters More Each Year
Biden Medicare tax changes have focused more on enforcement and compliance than on rate increases. The ongoing impact is that more taxpayers are subject to the surtax each year as wage growth pushes incomes above unchanged thresholds. If you were not affected five years ago, you may be now—even if your purchasing power has not changed.
2026 Income Thresholds for Medicare Taxes
| Filing Status | Threshold | Additional Medicare Tax Rate |
|---|---|---|
| Single | $200,000 | 0.9% |
| Married Filing Jointly | $250,000 | 0.9% |
| Married Filing Separately | $125,000 | 0.9% |
All earned income above these thresholds is subject to the additional tax. Employers are required to withhold once wages pass $200,000, but married couples may owe more at filing if their household exceeds $250,000 combined. This creates a common surprise at tax time for dual-income couples where neither spouse individually exceeds the withholding trigger.
Employees vs. Self-Employed: How Medicare Tax Differs
How Medicare taxes apply depends on whether you earn income as a W-2 employee or self-employed individual.
| Factor | W-2 Employee | Self-Employed (Schedule SE) |
|---|---|---|
| Standard Medicare Tax Rate | 1.45% (employee) + 1.45% (employer) | 2.9% (paid entirely by you) |
| Additional Medicare Tax | 0.9% on wages above threshold | 0.9% on SE income above threshold |
| Withholding | Employer withholds at $200,000 regardless of filing status | No withholding; must pay via estimated taxes |
| Deductible Portion | Employer share is not on your return | 50% of SE tax is deductible on Schedule 1 |
| Combined Income Consideration | Only your W-2 wages count for withholding trigger | All SE income aggregated with any W-2 wages |
For self-employed individuals, the burden is heavier because you pay both the employee and employer shares of the standard Medicare tax. When you add the 0.9% surtax on top, total Medicare taxes on income above the threshold can reach 3.8% of every dollar earned. This is one reason why self-employment tax planning is so critical for high-earning entrepreneurs and freelancers.
Net Investment Income Tax (NIIT)
Investment income is subject to a 3.8% Net Investment Income Tax if your Modified Adjusted Gross Income (MAGI) exceeds the threshold. Enacted alongside the Additional Medicare Tax as part of the ACA, it uses the same income thresholds.
Applies to: Capital gains, dividends, passive rental income, interest, royalties, annuities, and certain business income from passive activities.
Does NOT apply to: Wages, self-employment income, tax-exempt interest, distributions from retirement plans (IRAs, 401(k)s), or income from businesses in which you materially participate.
NIIT Rate: 3.8% on the lesser of net investment income or the amount your MAGI exceeds the threshold.
Example: Chris and Pat earn $270,000 (MFJ) in 2026 with $30,000 from investments. They pay 3.8% NIIT on $20,000 (the excess over their $250,000 threshold), resulting in $760 in NIIT.
Real Estate Investors and the NIIT
Real estate investors face a nuanced situation with the NIIT. Rental income is generally considered passive and therefore subject to the 3.8% tax above the threshold. However, if you qualify as a real estate professional under IRS rules (750+ hours and more than half your working time in real estate activities), your rental income may be treated as non-passive and exempt from the NIIT. This distinction can mean the difference between paying $3,800 on every $100,000 of rental income or paying nothing.
Did You Know: Gains from the sale of your primary residence are excluded from NIIT up to the Section 121 exclusion amount ($250,000 single / $500,000 married). However, any gain above the exclusion is subject to both capital gains tax and the 3.8% NIIT if you exceed the income threshold. This catches many homeowners off guard when selling an appreciated property.
How to Calculate Your Total Medicare Tax Liability
Calculate your total liability by looking at earned and investment income separately:
Determine your filing status and income threshold. Your threshold determines where the surtaxes begin.
Calculate the Additional Medicare Tax. Subtract your threshold from your total wages and/or self-employment income. Multiply the excess by 0.9%. If you have both W-2 wages and SE income, they are combined for this calculation.
Calculate the NIIT. Take the lesser of your net investment income or the amount your total MAGI exceeds the threshold. Multiply that figure by 3.8%.
Add both amounts together to determine your total additional Medicare-related tax liability for the year.
Example:
Emma earns $235,000 as a single self-employed professional and $12,000 in investment income. Her total MAGI is $247,000.
She owes a 0.9% Additional Medicare Tax on $35,000 (SE income above $200,000) = $315.
She also owes 3.8% NIIT on $12,000 (the lesser of her $12,000 investment income or her $47,000 MAGI excess) = $456.
Emma reports these amounts using IRS Form 8959 (Additional Medicare Tax) and Form 8960 (NIIT).
Withholding Pitfalls and Underpayment Penalties
A common mistake high earners make is underestimating their Medicare tax liability throughout the year. The IRS expects you to pay as you earn. Falling short can result in underpayment penalties and interest.
Common Withholding Mistakes
Dual-income couples: Employers withhold only when an individual exceeds $200,000. If both spouses earn $150,000 ($300,000 combined), neither employer withholds—but you owe the surtax on $50,000 at filing.
Mid-year job changes: Each new employer resets the $200,000 counter. You could earn $180,000 and $120,000 at two jobs ($300,000 total) with zero surtax withheld.
Self-employed individuals: No withholding occurs on SE income. You must include the surtax in quarterly estimated payments.
Investment income surprises: A large capital gain can push MAGI above the threshold unexpectedly, triggering NIIT with no withholding in place.
Pro Tip: Use the IRS safe harbor rule to avoid underpayment penalties. If you pay at least 110% of your prior-year tax liability through withholding and estimated payments (for AGI above $150,000), you are generally protected from penalties—even if you owe a balance at filing. Work with your tax advisor to run a mid-year projection and adjust your payments accordingly.
S-Corp Salary vs. Distribution: A Detailed Look
For business owners, electing S-Corporation status is one of the most effective strategies for managing Medicare tax exposure. The key advantage: splitting income between a reasonable salary (subject to Medicare taxes) and shareholder distributions (which are not). Here is how the math works for a single filer with $350,000 in business net income:
| Scenario | Sole Proprietor (Schedule C) | S-Corp ($150K Salary) |
|---|---|---|
| Income Subject to SE/Medicare Tax | $350,000 | $150,000 (salary only) |
| Standard Medicare Tax (2.9%) | $10,150 | $4,350 |
| Additional Medicare Tax (0.9%) | $1,350 (on $150K above threshold) | $0 (salary below threshold) |
| Distribution (Not Subject to Medicare) | N/A | $200,000 |
| Total Medicare Tax Savings | — | $7,150 |
The critical caveat: the IRS requires your salary to be “reasonable” for the work you perform. Setting it too low invites audit risk and reclassification of distributions as wages. For a detailed breakdown, see our guide on how to maximize S-Corp tax savings in 2026.
Strategies to Reduce Your 2026 Medicare Tax Burden
Beyond the S-Corp election, there are several additional strategies that can lower your total Medicare-related tax exposure:
Maximize Retirement Contributions: Traditional 401(k) contributions (up to $23,500 in 2026, plus $7,500 catch-up if 50+) reduce W-2 income and can keep you below the threshold. Solo 401(k) plans can shelter even more for self-employed individuals.
Health Savings Account (HSA): HSA contributions ($4,300 individual / $8,550 family in 2026) reduce AGI. Unlike FSA funds, HSA balances roll over and can be invested for long-term growth.
Charitable Giving Strategies: Donor-advised funds let you bunch multiple years of contributions into one year for a larger AGI deduction. Donating appreciated stock avoids capital gains and reduces MAGI simultaneously.
Income Timing: Deferring income to a lower-earning year or accelerating deductible expenses can help manage your threshold exposure.
Tax-Exempt Investments: Municipal bond interest is excluded from both AGI and net investment income, making it invisible to both surtaxes.
Uncle Kam in Action: A Real Client Example
Laura, a practice owner, was paying significant self-employment and Medicare taxes on $300,000 net income as a sole proprietor. By reorganizing as an S-Corp, paying herself a reasonable $180,000 salary and taking $120,000 in distributions, and maximizing Solo 401(k) contributions, she cut her Additional Medicare Tax bill by over $8,000 in one year. Read more client results →
Next Steps
Estimate your 2026 taxable income and compare against thresholds.
Review your business structure to identify optimization opportunities.
Schedule a consultation with tax advisory experts to develop your personalized strategy.
Bookmark the 2026 tax changes resource center for the latest updates.
Run a mid-year tax projection to ensure your withholding and estimated payments are on track.
Frequently Asked Questions
Does Additional Medicare Tax apply to Social Security benefits?
No. The Additional Medicare Tax applies only to wages, compensation, and self-employment income. Social Security benefits, pension income, and retirement plan distributions are not subject to this 0.9% surtax. However, these income sources can increase your MAGI, which may push you above the NIIT threshold.
Can I avoid this tax by incorporating?
You cannot avoid it entirely, but you can significantly reduce your exposure. An S-Corporation lets you split business income between a reasonable salary (subject to Medicare taxes) and shareholder distributions (which are not). The key is setting a salary the IRS considers reasonable for your role. S-Corp is typically preferred over C-Corp for Medicare tax savings because C-Corps introduce double taxation on dividends.
What about investment income?
Investment income is subject to the 3.8% Net Investment Income Tax (NIIT) when your Modified Adjusted Gross Income exceeds the threshold ($200,000 single / $250,000 MFJ). The NIIT covers capital gains, dividends, interest, passive rental income, royalties, and annuities. It does not apply to tax-exempt interest (such as municipal bonds), distributions from qualified retirement plans, or income from businesses in which you materially participate.
Are the thresholds indexed to inflation?
No. The thresholds for both the Additional Medicare Tax and the NIIT have remained unchanged since 2013. Congress did not build in an inflation adjustment, so as wages rise, a growing number of taxpayers are affected each year—a phenomenon sometimes called “bracket creep.”
How can I be sure my calculations are correct?
Use IRS Form 8959 for the Additional Medicare Tax and Form 8960 for the NIIT. These forms walk you through the calculations based on your filing status and income. For complex situations—such as combined W-2 and self-employment income—working with a qualified tax advisor ensures nothing is missed.
How does the NIIT affect real estate investors?
Real estate investors face the NIIT on rental income and property sale gains whenever their MAGI exceeds the threshold. However, qualifying as a real estate professional under IRC Section 469 (750+ hours/year in real estate, more than half your working hours) can reclassify rental income as non-passive and exempt it from the NIIT. Proper time tracking documentation is essential.
What is the best S-Corp salary to minimize Medicare tax?
There is no single “best” salary because the IRS requires it to be reasonable for the services you provide. The optimal salary balances Medicare tax savings against audit risk. Generally, your salary should reflect what someone in a comparable role and industry would earn. Setting your salary just below the threshold can maximize savings, but only if that figure is defensible as reasonable compensation. A qualified tax strategist can help you find the right balance.
Related resources:
- 2026 Tax Changes: Complete Guide
- Business Tax Strategy Services
- Strategies for High Earners
- S-Corp Tax Savings: Salary vs. Distributions
- Official IRS Resources
- IRS Form 8959
Disclaimer: This article is for informational purposes only and does not constitute legal, tax, or financial advice. Tax laws and regulations change frequently, and individual circumstances vary. Always consult with a qualified tax professional or CPA before making decisions about your tax strategy. Uncle Kam and its affiliates are not responsible for actions taken based on the information provided in this article.
