Definition
The Medicare Tax is a component of the Federal Insurance Contributions Act (FICA), which funds hospital insurance for individuals in the United States. It is imposed on compensation and self-employment earnings at a rate of 2.9%. Employers are responsible for withholding half of this tax (1.45%) from employees’ wages and contribute the remaining half. Self-employed individuals, on the other hand, account for the full 2.9% in their quarterly estimated income tax payments.
Examples
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Employee Example: An employee earning $50,000 annually will have $725 (1.45%) withheld from their paycheck for Medicare tax. The employer will also contribute an additional $725, matching the employee’s contribution.
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Self-Employed Example: A self-employed individual with annual earnings of $50,000 will need to pay 2.9% of their earnings in Medicare tax, equating to $1,450, as part of their quarterly estimated tax payments.
Frequently Asked Questions (FAQs)
Q1: Who is required to pay Medicare tax? A1: Both employees and employers are required to pay Medicare tax, as are self-employed individuals.
Q2: How is the Medicare tax rate divided between employers and employees? A2: The tax rate is 2.9% of earnings. Employers withhold 1.45% from employee wages and match this with a 1.45% contribution.
Q3: Does Medicare tax apply to all earnings? A3: Yes, the Medicare tax is levied on all earnings without an upper limit, unlike Social Security tax which has a wage base limit.
Q4: How do self-employed individuals pay Medicare tax? A4: Self-employed individuals pay the full 2.9% Medicare tax as part of their quarterly estimated income tax payments.
Q5: Are there any additional Medicare tax obligations? A5: Yes, high-income earners may be subject to an additional 0.9% Medicare tax on wages, compensation, and self-employment income exceeding certain thresholds ($200,000 for individuals, $250,000 for married couples filing jointly).
Related Terms
- Federal Insurance Contributions Act (FICA): A U.S. federal payroll tax imposed on both employees and employers to fund Social Security and Medicare.
- Self-Employment Tax: Tax comprising Social Security and Medicare taxes for individuals who work for themselves.
- Estimated Income Tax Payments: Periodic tax payments made by self-employed individuals to cover their tax liability on income and self-employment earnings.
Online Resources
- Internal Revenue Service (IRS): Medicare Taxes
- Social Security Administration: FICA
- U.S. Department of Health and Human Services: Medicare
Suggested Books for Further Studies
- “Taxing Ourselves: A Citizen’s Guide to the Debate Over Taxes” by Joel Slemrod and Jon Bakija
- “The Tax and Legal Playbook: Game-Changing Solutions to Your Small Business Questions” by Mark J. Kohler
- “J.K. Lasser’s Your Income Tax Professional Edition 2021” by J.K. Lasser Institute
Fundamentals of Medicare Tax: Accounting Basics Quiz
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