What is the Medicare Tax?
Here’s what you need to know about Medicare taxes.
The Medicare tax is what’s known as a type of payroll tax. It’s paid by both employers and employees, so it’s your responsibility to withhold the correct amount from the salaries of your employees. You also need to make a matching contribution.
The Federal Insurance Contributions Act (FICA) is made up of a combination of Social Security and Medicare.
FICA differs from income taxes because it’s a flat tax of 15.3% per year.
The chances are your employees are thinking about whether they must pay this tax on all types of income. The truth is that practically every type of compensation is eligible for Medicare.
Certain types of compensation are ignored for Medicare taxation purposes, though. Health insurance premiums are one type of compensation that won’t be taxed for Medicare.
IRS Publication 15 will tell you more about exempt benefits.
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What are Your Medicare Taxes Funding?
Medicare is the health insurance program offered by the Federal government. Millions of people take advantage of it every year and can access world-class medical treatment because of it.
Medicare taxes are what fund this program. They fund the four different parts of the program: coverage for prescription drugs, medical insurance, hospital insurance, and Medicare Advantage programs.
Anyone using Medicare will be able to benefit from both inpatient and outpatient care, as well as medications.
What is the Current Tax Rate for Medicare?
An employee will have to pay 1.45% of their wages every year to cover Medicare taxes. The employer is responsible for calculating the right amount and contributing 1.45% to the program. You can use the free withholding calculator to figure this amount
Medicare itself only makes up 2.9% of FICA. The rest of the 15.3% is for Social Security.
Let’s look at an example:
An employee earns $1,000 during a single pay period. You would need to withhold $14.50 for Medicare and contribute $14.50.
Medicare taxes must be withheld no matter what your employees earn. There’s no maximum limit, as there is with Social Security.
If they earn more than a certain amount, employers also must levy the Additional Medicare Tax.
What is the Additional Medicare Tax?
The Additional Medicare Tax is aimed at high-income taxpayers in the US. This tax is worth approximately 0.9% of everything above a certain limit.
However, employers aren’t responsible for contributing more than their original 1.45%. The Additional Medicare Tax isn’t employer matched.
So, what’s the income limit for different filing statuses?
Single Taxpayers – $200,000
Married and Filing Jointly – $250,000
Married and Filing Separately – $125,000
If you cross this threshold, you’ll be asked to withhold the Additional Medicare Tax.
For an employer, you only need to start withholding at $200,000. You’re not responsible for knowing your employee’s preferred filing status. It’s up to the employee to pay more to Medicare than what you withhold.
Paying and Reporting Medicare Taxes
There’s a depositing schedule you need to follow in order to deposit Medicare taxes. This can be either semi-weekly or monthly. Your tax liability over the last four financial quarters will determine this.
Medicare taxes, along with other types of Federal income taxes, as well as Social Security, should be deposited through the Electronic Federal Tax Payment System. Late deposits may incur financial penalties.
Every quarter you’ll need to file IRS Form 941. This is the Employer’s Quarterly Federal Tax Return.
On this form, you’ll be expected to record payroll withholdings and Medicare tax contributions, along with contributions to Social Security and Federal Income taxes.
The deadlines for Form 941 are: April 30th, July 31st, October 31st, and January 31st.
Those companies that obtain a notice from the IRS may be able to file annually. These companies will use Form 944, otherwise known as the Employer’s Annual Federal Tax Return.
What About Medicare Taxes When You’re Self-Employed?
Things are a tad more complicated when you’re self-employed.
Those who are self-employed must pay what’s known as self-employment taxes. These account for 15.3% of your income. And you must cover the entire amount as you’re both the employer and the employee, in the eyes of the IRS. There are tax deductions you may be able to make, however.
2.9% of your income goes towards paying your Medicare taxes, with the rest covering Social Security.
You’re also eligible to pay the Additional Medicare Tax if you cross the thresholds detailed above. The thresholds are the same, whether you’re self-employed or not. The Additional Medicare Tax percentage is also the same if you’re self-employed.
The self-employed may also have to file on a quarterly basis, with hard penalties if you fail to keep up with your paperwork.
It can be complicated for the self-employed to figure out what they need to pay in taxes. For further help, you can use the self-employment calculator to see how you can increase your tax savings.
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Frank Ellis is a Traverse City Tax Preparation Planner and published author. He has written tax and finance related articles for twelve years and has published over 1000 articles on leading financial websites.