When self-employed people talk about the "Medicare surtax," they are usually referring to two distinct federal taxes that were created by the Affordable Care Act and that both begin at the same income thresholds. The first is the Additional Medicare Tax of 0.9%, which applies to earned income (W-2 wages and net self-employment earnings) above your filing-status threshold. The second is the Net Investment Income Tax (NIIT) of 3.8%, which applies to investment income above that same threshold when measured against your modified adjusted gross income (MAGI). A successful sole proprietor can easily owe both in the same year, which is why we recommend you test your earned income here and then separately consider your investment income for the 3.8% test. The two taxes stack on top of the regular 15.3% self-employment tax.
Why the Thresholds Matter More Every Year
The income thresholds that trigger these taxes are not indexed for inflation. Congress set them at fixed dollar amounts in 2013, and they have never been adjusted. As wages and business profits rise with inflation, an increasing number of middle-class freelancers cross the line each year without any real increase in purchasing power. The thresholds are:
Pay special attention to the married-filing-separately threshold of $125,000. It was deliberately set at half the joint threshold to stop married couples from splitting income across two returns to duck the tax. If you are married but file separately, you owe the surtax the moment your own earned income passes $125,000, even though a jointly-filing couple with the exact same total income would not owe a penny until their combined income exceeded $250,000.
How the Surtax Sits on Top of the Regular SE Tax
Before any surtax exists, every self-employed person already pays a 2.9% Medicare tax on 100% of net self-employment earnings. Unlike the 12.4% Social Security portion, Medicare has no income cap, so it applies to every dollar of net SE income. Because the self-employed pay both the employer and employee halves, the standard SE tax is 15.3% on earnings up to the Social Security wage base (which is $176,100 for 2025) and then 2.9% on everything above it. The Additional Medicare Tax is an extra 0.9% layered on the 2.9% Medicare rate for the portion of earned income above your threshold. In other words, for high earners the marginal Medicare rate becomes 3.8% (2.9% + 0.9%) on the excess, on top of the 12.4% Social Security tax up to the wage base.
Worked Example — Single filer, $250,000 net SE income
Net self-employment earnings: $250,000
Single threshold: $200,000
Amount over threshold: $250,000 − $200,000 = $50,000
Additional Medicare Tax = $50,000 × 0.9% = $450
This $450 is added on top of the regular Medicare tax of 2.9% ($7,250) and the Social Security tax of 12.4% up to the wage base. The surtax looks small at this income, but it scales linearly: at $400,000 of net SE income the excess is $200,000 and the surtax jumps to $1,800.
Worked Example — Married Filing Jointly, One High Earner
Consider a married couple filing jointly with combined earned income of $320,000, where one spouse has $220,000 of net self-employment earnings and the other has $100,000 of W-2 wages. The joint threshold is $250,000, so the excess is $70,000. The Additional Medicare Tax is $70,000 × 0.9% = $630. The tax is computed on the couple's combined earned income, not on each spouse separately, which is why filing jointly is usually advantageous when one spouse is a high earner.
Worked Example — Married Filing Separately trap
A sole proprietor earning $150,000 who files separately from a spouse: threshold is only $125,000.
Excess: $150,000 − $125,000 = $25,000
Additional Medicare Tax = $25,000 × 0.9% = $225.
Had the same couple filed jointly on $300,000 combined, they would be under the $250,000 threshold and owe $0. Filing separately can therefore create a surtax that would not exist on a joint return.
The Net Investment Income Tax (3.8%) — Do Not Forget It
The NIIT is a separate 3.8% tax computed on the lesser of (a) your net investment income for the year or (b) the amount by which your MAGI exceeds the threshold. Net investment income includes taxable interest, dividends, capital gains, rental and royalty income, non-qualified annuity income, and income from a trade or business that is a passive activity or that trades financial instruments. For an active sole proprietor, the day-to-day business profit is generally not net investment income, but passive real-estate income, portfolio gains, and dividends are. It is calculated on Form 8960.
Worked Example — NIIT
Married filing jointly, MAGI $300,000, of which $40,000 is net investment income.
Excess MAGI: $300,000 − $250,000 = $50,000.
NIIT = 3.8% × lesser of $40,000 and $50,000 = 3.8% × $40,000 = $1,520.
Notice the NIIT ($1,520) is more than three times the 0.9% surtax on earned income in a similar situation, which is why high earners with portfolios feel the 3.8% far more than the 0.9%.
How the Self-Employed Actually Pay the 0.9%
W-2 employees have the 0.9% withheld by their employer once wages cross the threshold, and the employer does not pay a matching portion. Self-employed people have no employer, so they calculate the tax on Form 8959 (Additional Medicare Tax) and carry it to Schedule 2 of Form 1040, where it is added to the regular income tax and the regular SE tax. One important detail: you may deduct one-half of your regular self-employment tax as an above-the-line adjustment to income, but you cannot deduct the 0.9% Additional Medicare Tax. That makes the surtax slightly more expensive than the underlying SE tax for high earners, because there is no corresponding deduction to soften it.
Does an S-Corp Election Escape the Surtax?
Many freelancers elect S-Corporation status so they can split compensation into a reasonable salary (subject to payroll taxes) and distributions (not subject to SE tax). The Additional Medicare Tax still applies: it hits your salary above the threshold exactly as it would hit W-2 wages. If your reasonable S-Corp salary stays below $200,000 (single) or $250,000 (joint), the 0.9% may not apply to the salary portion, and distributions are not earned income so the 0.9% never reaches them. However, the 3.8% NIIT can still reach investment income regardless of entity choice. An S-Corp is a useful planning tool, but it is not a magic shield against the surtax. See our S-Corp vs Sole Prop calculator for the full comparison.
Common Mistakes High Earners Make
- Forgetting the joint threshold is combined. A couple where one spouse earns $260,000 exceeds the $250,000 joint threshold even though the lower-earning spouse thinks "we aren't that rich."
- Assuming the 50% SE deduction covers the surtax. It does not. Only the regular 12.4%/2.9% base SE tax is half-deductible; the 0.9% is not.
- Ignoring the 3.8% NIIT. Sole proprietors often focus on the 0.9% and forget that investment income can trigger a much larger 3.8% bill.
- Walking into the married-filing-separately trap. Filing separately drops the threshold to $125,000 and frequently increases the total bill.
- Failing to make estimated payments. The surtax is not withheld automatically for the self-employed. You must include it in your quarterly estimated payments or you risk an underpayment penalty.
- Double-counting with an S-Corp. Some owners assume electing S-Corp eliminates the tax entirely and stop planning for it, only to discover the salary portion is still exposed.
Planning Levers to Reduce the Bill
If you are close to a threshold, several legitimate strategies can keep you under it or reduce the exposed amount:
- Max out retirement contributions. SEP IRA, Solo 401(k), and SIMPLE IRA contributions reduce net SE earnings (helping the 0.9% test) and reduce AGI/MAGI (helping the 3.8% test). Use our Retirement Deduction calculator to size them.
- Time income and deductions. Deferring a large client payment into the next year or accelerating a deductible purchase can keep you under the threshold in the current year.
- Harvest investment losses. Lowering net investment income directly reduces NIIT exposure, because the tax is based on the lesser of NII or the MAGI excess.
- Review your S-Corp reasonable salary. Setting a defensible salary just under the threshold can avoid the 0.9% on salary, while distributions escape SE tax entirely.
- Consider health savings accounts. HSA contributions lower MAGI and can ease NIIT exposure for eligible taxpayers.
How This Connects to Your Other Self-Employment Taxes
The Additional Medicare Tax is the top layer of a multi-layer federal tax stack. Below it sits the base Self-Employment Tax of 15.3%, then income tax on the net, and possibly state tax (see our State SE Tax calculator). If your total federal bill is large, you must pay it through quarterly estimated payments. Because lowering net SE income lowers both the base SE tax and the 0.9% surtax, anyone near the threshold should first explore the Retirement Deduction calculator and, if applicable, the S-Corp vs Sole Prop calculator. Gig workers on Uber or Upwork should also review the Uber and Upwork calculators, since platform income flows into the same net-SE-income calculation.