What Is Medicare Tax? An In-Depth Guide for Employers & Employees

If you're an employer or employee in the United States, you should know all the details about Medicare Tax. Our comprehensive guide provides an in-depth look at what Medicare tax is, its implications for employers and employees, and how much it actually costs.

What is Medicare Tax?

Medicare tax is a payroll tax shared between employers and employees, forming a part of the Federal Insurance Contributions Act (FICA) tax. Unlike the Social Security tax, which also falls under FICA, the Medicare tax has no wage base limit. 

Both employers and employees contribute to this tax, with a fixed rate of 1.45%. This means that 1.45% is withheld from an employee's wages, and employers must make a matching contribution of 1.45%.

Medicare Tax Breakdown:

1. Employee's Share: 1.45% of gross wages
2. Employer's Share: Matching 1.45% of gross wages

Accordingly, the amount of Medicare tax withheld is 1.45% of an employee's gross wages. For example, if an employee earns $1,000 in gross wages during a pay period, the Medicare tax withheld would be $14.50 ($1,000 * 0.0145).

However, there is also an additional medicare tax for higher earners. Individuals with higher incomes may be subject to an additional 0.9% Medicare tax. This tax applies to earnings exceeding $200,000 for single filers, $250,000 for married couples filing jointly, and $125,000 for married individuals filing separately.

There's no need for concern regarding an employee's filing status. Just proceed with withholding the additional Medicare tax from wages surpassing the $200,000 mark.

For instance, if an employee earns above $200,000, you should withhold 2.35% (comprising 1.45% + 0.9%) from their wages, along with a matching 1.45% contribution. 

Medicare Tax Deduction

Medicare tax deduction is the process of withholding a specified percentage from an employee's wages. This deduction helps fund the Medicare health insurance program, which provides essential coverage for individuals aged 65 or older and those under 65 with qualifying conditions.

Keep in mind that there are 4 parts of medicare coverage that provide different services:

What is the Medicare Tax Rate?

As we’ve mentioned above, the Medicare tax rate is 2.9%, with this sum being divided equally between employers and employees, resulting in a 1.45% contribution from each party. This portion is deducted from the individual's salary through the payroll process.

How Employers Deposit Medicare Taxes

Employers are required to deposit Medicare taxes, along with Social Security and federal income taxes, following a specific schedule. The depositing schedule is determined by the reported tax liability using a four-quarter IRS lookback period. The Electronic Federal Tax Payment System (EFTPS) is the recommended method for depositing these taxes.

Medicare Taxes for the Self-Employed

Should you also pay Medicare taxes if you are self-employed?

Yes!  If you fall into the self-employed category, you are obligated to pay self-employment tax, similar to a FICA tax that you handle independently. This self-employment tax encompasses contributions to both Medicare insurance and Social Security, amounting to 15.3% of your earnings.

Within the 15.3% self-employment tax rate, the Medicare tax constitutes 2.9%. Note, that additional medicare taxes should also be paid if your income exceeds certain thresholds. For single filers, this threshold is set at $200,000, while it stands at $250,000 for those married and filing jointly, and $125,000 for married individuals filing separately.

How to Calculate and Manage Medicare Taxes

Figuring out Medicare taxes can be tricky, but using a handy payroll tool like PayStubs.com makes it easy for employers. PayStubs.com automates the tax calculation based on employee info, saving time and ensuring things are right.

PayStubs.com is a smart move for efficiency, letting businesses focus on what they do best. Try it today to save your precious time and effort!