What Is Employee Medicare Tax and How Does It Work?
Demystify employee Medicare tax. Learn how this federal payroll contribution works and its role in funding healthcare from your paycheck.
The employee Medicare tax is a fundamental component of the federal payroll tax system, playing a significant role in funding the Medicare program. This program provides health insurance coverage for individuals aged 65 and older, as well as certain younger individuals with disabilities. It is a mandatory contribution deducted from an employee’s gross wages, directly supporting the nation’s healthcare infrastructure.
Standard Employee Medicare Tax
The standard employee Medicare tax rate is 1.45% of an employee’s gross wages. This employee contribution is matched by the employer, resulting in a combined 2.9% directed towards the Medicare hospital insurance fund. A distinguishing feature of the standard Medicare tax is the absence of a wage base limit, meaning all covered wages an employee earns, regardless of the amount, are subject to this 1.45% tax.
For example, if an employee earns $50,000 in a year, the entire $50,000 is subject to the 1.45% Medicare tax. This differs from the Social Security tax, which has an annual wage base limit beyond which earnings are no longer taxed. The Medicare tax ensures that every dollar of an employee’s compensation contributes to the federal healthcare system.
Additional Medicare Tax
The Additional Medicare Tax applies to high-income earners. This supplementary tax was introduced as part of the Affordable Care Act (ACA) in 2013, designed to increase contributions from individuals with higher earnings. The rate for the Additional Medicare Tax is 0.9%, levied on top of the standard 1.45% Medicare tax.
This 0.9% tax applies to wages, self-employment income, and railroad retirement compensation that exceed specific income thresholds, which vary based on tax filing status. For single filers and those filing as Head of Household or Qualifying Widow(er), the threshold is $200,000. Married individuals filing jointly face a threshold of $250,000, while those married filing separately have a threshold of $125,000.
This 0.9% tax applies only to the income amount exceeding these thresholds, not the entire income. For instance, a single filer earning $210,000 would pay the additional tax only on the $10,000 above the $200,000 threshold. The employer does not match this Additional Medicare Tax; it is solely an employee contribution.
Withholding and Reporting
Employers are legally obligated to withhold employee Medicare tax, including both standard and additional components, directly from an employee’s paycheck. This ensures that contributions are made regularly throughout the year, aligning with the pay cycle.
Employees can observe these withholdings on their pay stubs, typically listed alongside other payroll deductions. At the close of each calendar year, employers provide employees with a Form W-2, Wage and Tax Statement. This document details the total Medicare wages and tips earned in Box 5 and the corresponding Medicare tax withheld in Box 6.
Employers remit withheld employee Medicare taxes, along with their matching contributions, to the Internal Revenue Service (IRS). For the Additional Medicare Tax, employers must begin withholding the 0.9% once an employee’s wages exceed $200,000 in a calendar year, regardless of the employee’s filing status or other income sources. Employees whose total income exceeds the Additional Medicare Tax thresholds may need to make estimated tax payments or adjust their Form W-4 withholding to cover any shortfall.