What is Medicare Tax and How Does it Work?

All income earners have to pay taxes during the year. This helps to make sure that the schools are funded, libraries run, and other important things are given the funding that they need. One additional tax that you may notice when you look at your paystub each month is the Medicare Tax. What is the Medicare tax and how does it work against your earnings?

What is the Medicare Tax?

The Medicare tax is simply a payroll tax. Employees will need to pay a certain amount and then their employers will match it to get to the final amount. Both Social Security and Medicare will make up the FICA tax, or the Federal Insurance Contributions Act.

For the most part, all types of compensation are subject to the Medicare tax. This is going to include regular wages, commissions, tips, bonuses, and overtime. There are a few fringe benefits that will be covered.

Some benefits will be exempt from this though. This can include health insurance premiums and any contributions from the employer for a qualified deferred compensation plan. Many times the employer and HR will take care of the Medicare tax for you, taking it out of your paycheck and making sure you get the tax paid off.

Understanding Additional Medicare Tax

Taxes for programs such as Medicare are often not understood that well. The additional Medicare Tax is going to apply to those who make above the set income level for the year. This amount will change from one tax year to the next to adjust for inflation and rising wages. This basically requires taxpayers who earn more money to pay more into Medicare.

While everyone has to pay a bit of their taxes to Medicare, the additional Medicare tax is just for higher income earners. Those who earn less than this limit will not need to worry about the tax. If you are close to the limit, working with your tax professional can help you find the necessary deductions to avoid this later on.

The tax rate for the Additional Medicare Tax will be at 0.9 percent. This means that if you get employment wages, you will pay 2.35% on this, while self-employed taxpayers will pay 3.8%. As an income wage earner, your employer will be able to withhold it from all your paychecks. Self-employed individuals will be able to pay it throughout the year when they do their quarterly taxes.

The additional rate will apply when you have the following include:

• Single: When you make $200,000 or above.
• Married filing jointly: $250,000
• Married filing separately: $125,000

The self-employed individual will need to pay the higher tax rate as well. They will be at the same income level when it comes to the Additional Medicare tax as well. Working with a financial planner will help you determine how much you will need to pay for these taxes.

What About Self-Employed Individuals?

Even if you work for yourself, you will need to pay in the Medicare tax. The amount that you pay is usually a bit higher and you will not have an employer match on it like a salaried employee. Depending on whether you owe above a certain threshold for taxes at the end of the year, after deductions, you can pay it when you do your taxes each year or you can pay it quarterly with the rest of your taxes. A tax professional will be able to walk you through this to make sure you get the right amount of Medicare taxes paid.

What do Medicare Taxes Fund?

Now that we know a little bit more about the Medicare taxes and what they are all about, many taxpayers may be curious as to what Medicare taxes fund in the first place?  These taxes are going to fund Medicare coverage, which is the federal health insurance program that will provide millions of disabled and retired individuals with the access they need to medical treatment.

There are four different parts that come with the Medicare program. These include:

• Medical insurance
• Hospital insurance
• Medicare Advantage plans
• And coverage for prescription drugs

Those who receive coverage through Medicare will be able to obtain benefits like inpatient hospital care, medications, and outpatient care. Taxpayers help to fund this while they are working and will get to receive the benefits when they get older.

Paying the Medicare Tax

For most employees, the Medicare tax is taken out of your paycheck each month. You will not have to take additional steps to get it done. The HR department for your employer will figure out the exact amount that you owe and will add that to your paystub so you can check the math. For self-employed individuals, you will need to take accurate accounts of your income to make sure that you pay the right amount.