If you have employees, you are responsible for handling and paying Medicare tax. Learn what Medicare tax is, what it funds, and how much it costs.
What is Medicare tax?
Medicare tax is a payroll tax. It is an employee and employer tax, meaning you must withhold a certain amount from an employee’s wages and make a matching contribution. You must do this for each one of your employees.
Both Medicare and Social Security taxes make up FICA (Federal Insurance Contributions Act) tax. Unlike income taxes, which are determined by Form W-4 information, filing status, and pay rate, FICA tax is a flat rate of 15.3%.
Your employees might wonder, Do I have to pay Medicare tax 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.
However, 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, you can 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: hospital insurance, medical 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 Medicare tax rate is 1.45% of an employee’s wages. Again, Medicare is an employer and employee tax. 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.
Let’s say a Medicare employee earns $1,000 in gross wages each pay period. Withhold $14.50 from their wages ($1,000 X .0145) for Medicare tax. And, contribute a matching $14.50.
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, you are not responsible for contributing the additional Medicare tax rate. 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.
Depositing and reporting taxes
To make Medicare tax deposits, you must follow your depositing schedule, which is either monthly or semi-weekly. Your schedule is determined by your reported tax liability using a four-quarter, IRS lookback period.
Deposit Medicare taxes, along with Social Security and federal income taxes, using the Electronic Federal Tax Payment System (EFTPS). The IRS can charge you penalties if you make late deposits, so be sure to make on-time payments.
On a quarterly basis, you will need to file Form 941, Employer’s Quarterly Federal Tax Return. Record quarterly payroll withholdings and contributions for Medicare tax, Social Security tax, and federal income tax. Form 941 is due on April 30, July 31, October 31, and January 31.
You may be able to report your tax deposits on a yearly basis if you receive a written notice from the IRS. To report annually, file Form 944, Employer’s Annual Federal Tax Return.
Include Medicare taxable wages and how much tax you withheld from each employee’s pay on Form W-2.
Medicare and taxes for the self-employed
Do you have to pay Medicare tax on your wages if you are self-employed?
If you are self-employed, you must pay self-employment tax, which goes toward Medicare and Social Security tax. Self-employment tax is 15.3% of your income. You are responsible for paying the full amount of 15.3%.
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 (single), $250,000 (married filing jointly), or $125,000 (married filing separately).
For more information on self-employment tax, visit the IRS’s website.
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This article has been updated from its original publication date of 7/16/2012.