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Understanding Medicare Tax

If you have employees, you are responsible for withholding and paying Medicare tax. So what is Medicare tax, what does it fund, and how much does it cost.

What is Medicare tax?

Medicare tax is a payroll tax. It is an employee and employer tax, meaning you must withhold a specific amount from an employee’s wages and make an employer contribution as well. You must do this for each one of your employees.

FICA (Federal Insurance Contributions Act) tax is made up of both Medicare and Social Security taxes. Unlike income taxes, which are determined by withholding allowances, filing status, and pay rate, FICA tax is a flat rate.

Is Medicare tax withheld on all types of income? For the most part, all compensation is subject to Medicare tax. This includes regular wages, tips, commissions, bonuses, overtime, and some fringe benefits.

Some benefits are exempt from Medicare tax, like health insurance premiums and employer contributions to a qualified deferred compensation plan. For more information on which benefits are exempt from Medicare tax, check out IRS Publication 15.

What do Medicare taxes fund?

Medicare taxes fund Medicare coverage, a federal health insurance program that gives millions of retired and disabled individuals access to medical treatment.

There are four parts of the Medicare program: medical insurance, hospital insurance, Medicare Advantage plans, and prescription drug coverage. Recipients of Medicare coverage obtain benefits like inpatient hospital care, outpatient care, and medications.

What is the Medicare tax rate?

The current Medicare tax rate is 1.45%. Again, Medicare is an employer and employee tax, so you must withhold 1.45% from an employee’s pay and contribute a matching 1.45%. Altogether, Medicare makes up 2.9% of the FICA tax rate of 15.3%. The rest goes toward Social Security taxes.

For Example, let’s say an employee earns $500 in gross wages each pay period. Withhold $7.25 from their wages ($500 X .0145) for Medicare tax. And, contribute a matching $7.25.

Unlike the Social Security wage base, there is no limit to taxable Medicare wages. Continue withholding Medicare tax regardless of what your employees earn. And if an employee earns a certain amount, they are subject to an additional Medicare tax.

Additional Medicare tax

When an employee earns more than a certain amount, you must withhold an additional percentage from their wages. However, the employer is not responsible for contributing the additional Medicare tax rate, and should continue contributing 1.45%.

The additional Medicare tax rate is 0.9%. The additional Medicare tax rate applies when an employee reaches one of the following thresholds, depending on their filing status:

  • Single: $200,000

  • Married filing jointly: $250,000

  • Married filing separately: $125,000

For example, when a single employee earns more than $200,000, you must withhold 2.35% (1.45% + 0.9%) from their wages.

As an employer, you are only required to begin withholding the additional Medicare tax when an employee earns more than $200,000. You do not need to worry about the employee’s filing status. Employees with a filing status of married filing jointly or filing separately will need to either pay more additional Medicare tax than what you withhold or receive a tax refund.

For more information on additional Medicare tax, visit the IRS’s website.

Medicare and taxes for self-employed individuals

If you are self-employed, you must pay self-employment taxes, which goes toward Medicare and Social Security tax. Self-employment tax is 15.3% of your income. Of the 15.3% self-employment tax rate, 2.9% goes toward Medicare tax. And, you must pay the additional Medicare tax when you earn above $200,000.

For more information on self-employment tax, visit the IRS’s website.

Do you want an easier way to calculate and remit payroll taxes? When you run a payroll with our full payroll services, we will calculate, withhold, and submit all payroll taxes for you.

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