Is Medicare Tax Withheld Deductible?
Navigate the rules of Medicare tax deductibility. Understand its implications for employees and self-employed taxpayers.
Medicare tax, a component of the Federal Insurance Contributions Act (FICA) tax, helps fund the Medicare program, which provides health insurance for individuals aged 65 or older and certain younger people with disabilities. This article clarifies the deductibility of Medicare tax for both employees and self-employed individuals, and how these amounts are treated.
Employee Medicare Tax Withholding and Deductibility
Medicare tax withheld from an employee’s wages is not deductible on their federal income tax return. Payroll taxes, such as Medicare and Social Security, are distinct from income taxes and are considered non-deductible for employees.
Employers also pay a matching share of Medicare tax, which is 1.45% of an employee’s wages. This employer-paid portion is a business expense for the employer but does not create a deduction for the employee. The employee’s Medicare tax of 1.45% applies to all earned income, with no wage base limit. An additional Medicare tax of 0.9% may apply to wages exceeding certain thresholds, such as $200,000 for single filers, and this additional tax is also not deductible by the employee.
Self-Employment Tax and Medicare Deductibility
Self-employed individuals face a different tax structure, as they are responsible for both the employee and employer portions of Social Security and Medicare taxes. These combined taxes are known as self-employment tax, with a total rate of 15.3% on net earnings from self-employment, comprising 12.4% for Social Security and 2.9% for Medicare. This tax applies if net earnings from self-employment are $400 or more.
Self-employed individuals can deduct one-half of their self-employment tax. This deduction is taken as an adjustment to income on Form 1040. This provides self-employed individuals with a similar tax treatment to employees, who do not pay the employer’s share of FICA taxes. This deduction reduces the self-employed individual’s adjusted gross income (AGI), which can impact other tax calculations.
The self-employment tax is calculated based on 92.35% of net earnings from self-employment. For example, if a self-employed individual has $50,000 in net earnings, the self-employment tax is calculated on $46,175 ($50,000 x 0.9235). The deduction for one-half of the self-employment tax only impacts the income tax liability and does not reduce the net earnings subject to self-employment tax itself.
Reporting Medicare Tax on Your Tax Return
For employees, the amount of Medicare tax withheld from their wages is reported in Box 6 of Form W-2, Wage and Tax Statement. Although listed on the W-2, this amount is not entered as a deduction anywhere on Form 1040 because it is not deductible for income tax purposes.
Self-employed individuals calculate their self-employment tax on Schedule SE (Form 1040), Self-Employment Tax. This schedule determines the total Social Security and Medicare taxes due from self-employment income. The deductible portion, which is one-half of the calculated self-employment tax, is then transferred from Schedule SE to Form 1040 as an adjustment to income. This deduction effectively lowers the taxpayer’s adjusted gross income (AGI), which can reduce their overall income tax liability.