How to Calculate Medicare Tax Withheld

Medicare tax is a mandatory federal tax that funds the Medicare program, providing health insurance primarily for individuals aged 65 or older and certain younger people with disabilities. It is a component of the federal payroll tax system, applied to earnings to ensure the financial stability of the healthcare system.

Understanding the Standard Medicare Tax

The standard Medicare tax rate is 1.45% of an individual’s earnings. This rate applies universally to all earned income, as there is no wage base limit for Medicare tax. Unlike Social Security tax, which has an annual earnings cap, the Medicare tax applies to an unlimited amount of income.

For employees, this 1.45% is typically withheld directly from their paychecks by their employer. If an employee earns $50,000 in a year, the Medicare tax withheld would be $725 ($50,000 0.0145).

Self-employed individuals pay both the employee and employer portions of the Medicare tax, totaling 2.9% (1.45% employee share + 1.45% employer share). They can deduct one-half of their self-employment taxes, including the Medicare portion, when calculating their adjusted gross income.

Calculating Additional Medicare Tax

A 0.9% Additional Medicare Tax applies to individuals whose income exceeds certain thresholds. This tax is levied on earnings above these amounts, which vary by filing status:
$200,000 for single filers, Head of Household, and Qualifying Widow(er)s
$250,000 for Married Filing Jointly
$125,000 for Married Filing Separately

This 0.9% tax applies to the amount of Medicare wages or self-employment income that exceeds these thresholds. For example, a single individual earning $220,000 in wages would pay the additional 0.9% tax on $20,000 ($220,000 – $200,000). The total Medicare tax rate for this portion of income would be 2.35% (1.45% standard + 0.9% additional).

Employers are responsible for withholding this additional 0.9% once an employee’s wages exceed $200,000 in a calendar year, regardless of the employee’s filing status. There is no employer match for this Additional Medicare Tax. Self-employed individuals must also factor this into their estimated tax payments if their net earnings exceed the applicable thresholds.

Income Subject to Medicare Tax

Medicare tax is primarily applied to wages and net earnings from self-employment. Wages include salaries, bonuses, commissions, and tips. Taxable non-cash compensation, such as fringe benefits, can also be subject to Medicare tax.

Net earnings from self-employment refer to income an individual earns from a trade or business, calculated after deducting business expenses. The tax applies to 92.35% of net earnings from self-employment.

Certain types of income are not subject to Medicare tax. These include investment income, such as interest, dividends, and capital gains, as well as most passive income. Retirement distributions, such as payments from pensions or annuities, are also exempt.

Withholding and Payment Mechanisms

The collection of Medicare tax differs based on an individual’s employment status. For employees, the process is largely automated, with employers bearing the responsibility for withholding the tax. Employers calculate the Medicare tax based on the employee’s gross wages and deduct it from each paycheck.

These withheld amounts are then remitted directly to the IRS by the employer. At the end of the year, the total Medicare tax withheld from an employee’s wages is reported in Box 6 of their Form W-2, Wage and Tax Statement. This system ensures that an employee’s Medicare tax obligations are largely met throughout the year through regular payroll deductions.

Self-employed individuals, conversely, are responsible for calculating and paying their own Medicare tax. This tax is part of the larger self-employment tax, which also includes the Social Security tax component. Self-employment tax is computed on Schedule SE (Form 1040), Self-Employment Tax, which calculates the total amount due based on net earnings from self-employment. Since there is no employer to withhold taxes, self-employed individuals typically pay their estimated tax liability, including Medicare tax, in quarterly installments throughout the year to the IRS.

Reviewing Your Medicare Tax Information

Individuals should periodically review their Medicare tax information to ensure accuracy. For employees, the most accessible way to check Medicare tax withheld is by examining their pay stubs. These documents typically detail the current and year-to-date amounts of Medicare tax deducted from earnings.

At the end of each year, employees receive Form W-2 from their employer. Box 6 of Form W-2 specifically shows the total amount of Medicare tax withheld for the entire year. This figure should align with the cumulative amounts shown on pay stubs and is crucial for preparing an accurate income tax return.

Self-employed individuals can find their total Medicare tax liability on Schedule SE (Form 1040). This form summarizes their net earnings from self-employment and calculates the Medicare tax portion of their self-employment tax. Reviewing Schedule SE helps self-employed individuals confirm their tax obligations and reconcile any estimated tax payments made throughout the year.