Social Security and Medicare Funding Bill Targets $400k+ Earners with New Payroll and Investment Taxes

This bill, officially titled the Medicare and Social Security Fair Share Act, is a major overhaul of how high-earners contribute to the nation’s safety net programs. The core idea is to shore up the funding for Social Security and Medicare by significantly increasing the taxes paid by individuals earning over $400,000 annually and those with substantial investment income. Essentially, if you’re pulling in big numbers, this bill is looking to raise the bar on your contribution to the trust funds.

The Return of the Social Security Doughnut

Right now, Social Security taxes (OASDI) stop once your income hits a certain cap—it’s a flat tax up to that limit, then zero. This bill changes that for high earners. It creates what’s sometimes called a “doughnut hole” tax structure. If the standard Social Security wage base cap is less than $400,000, wages between that cap and $400,000 will now be subject to the standard Social Security tax. This means the 6.2% tax (paid by both employee and employer) will kick back in for that income band. This only affects the top slice of earners, but it means more money flowing into the Social Security Trust Funds from the highest salaries.

For most people, the impact is zero, as their wages don't hit the existing cap, let alone $400,000. But for the high-earning software engineer, executive, or specialized doctor, this provision (SEC. 2) means a noticeable increase in payroll taxes.

New Medicare Tax Hits Half-Million Mark

Beyond the Social Security adjustment, the bill adds a brand-new tax specifically for Medicare’s Hospital Insurance (HI) fund. This is a 1.2% tax on wages that exceed certain thresholds: $500,000 for joint filers and $400,000 for single filers (SEC. 2). This is on top of the existing 1.45% Medicare tax and the 0.9% additional Medicare tax already paid by high earners.

If you’re a high-earning employee, your employer is responsible for withholding this new 1.2% tax, but only on the wages they pay you that exceed $400,000. Here’s the catch: if your employer fails to withhold the correct amount, you as the employee are still responsible for paying it when you file your taxes. This shifts the compliance risk onto the employee, which could be a headache for anyone who works for an employer with shaky payroll practices. Self-employed people earning above these thresholds will also pay this extra 1.2% tax on their net earnings (SEC. 3).

Investment Income Tax Gets a Massive Hike

Perhaps the most dramatic change in this bill is found in Section 4, which deals with investment income. The existing Net Investment Income Tax (NIIT) is 3.8%. This bill introduces a new, much higher rate for the wealthiest Americans and significantly changes the rules for trusts and estates.

If your Modified Adjusted Gross Income (MAGI) is over $400,000 (joint filers) or $500,000 (single filers), the NIIT rate jumps to a whopping 17.4%. This steep increase applies to the smaller of your investment income or the amount your MAGI exceeds the threshold. Furthermore, the bill expands what counts as taxable investment income (calling it “specified net income”), pulling in some income that used to be excluded, such as profits from certain active trades or businesses.

For trusts and estates, the tax hit is even bigger. The NIIT rate on undistributed income for trusts and estates skyrockets from 3.8% to 17.4% (SEC. 4). This is a massive change that will significantly impact estate planning and the cost of maintaining certain trusts.

Securing the Safety Net with Investment Dollars

Starting in 2026, the entire revenue stream generated by the Net Investment Income Tax will be diverted directly into the Social Security Trust Funds (SEC. 4). Currently, this money goes to the general fund. This is a major structural change aimed at stabilizing the funding for Social Security. The revenue will be split among the Old-Age and Survivors Trust Fund (71.3%), the Disability Insurance Trust Fund (10.3%), and the Hospital Insurance Trust Fund (28.7%). This move links investment taxes directly to the social safety net, providing a dedicated and potentially robust new funding source.