What Is Federal Medicare Tax & How Is It Calculated?
Understand Federal Medicare Tax: what it is, how it's calculated, and its vital role in U.S. healthcare funding.
Federal Medicare Tax is a mandatory contribution that funds the U.S. healthcare system. It is a component of the Federal Insurance Contributions Act (FICA) tax, alongside Social Security tax. It primarily supports Medicare Part A, which provides hospital insurance for individuals aged 65 and older, and certain younger individuals with disabilities, covering hospital stays, skilled nursing care, hospice care, and some home health services.
Standard Medicare Tax Calculations
The standard Federal Medicare Tax applies to all earned income, including wages and net earnings from self-employment, without a wage base limit. For employees, the Medicare tax rate is 1.45% of their gross wages, and employers also contribute a matching 1.45%. The combined rate is 2.9% on an employee’s wages. For example, if an employee earns $60,000 in a year, their Medicare tax contribution would be $870 (1.45% of $60,000), with their employer contributing an additional $870.
Self-employed individuals are responsible for paying both the employee and employer portions of the Medicare tax. They pay the full 2.9% of their net earnings. Only 92.35% of net earnings are subject to this tax when calculating self-employment tax. For instance, a self-employed individual with $70,000 in net earnings would calculate their Medicare tax based on 92.35% of that amount, then apply the 2.9% rate.
Additional Medicare Tax for High Earners
An Additional Medicare Tax applies to higher income earners. This 0.9% tax applies to Medicare wages, self-employment income, and railroad retirement (RRTA) compensation exceeding specific income thresholds. These thresholds vary based on tax filing status: $200,000 for single filers, $250,000 for those married filing jointly, and $125,000 for married individuals filing separately.
This additional tax is solely the responsibility of the employee or self-employed individual; employers do not match it. Its purpose is to help fund provisions of the Affordable Care Act (ACA), including the premium tax credit. A high-earning employee would pay a total Medicare tax of 2.35% (1.45% standard + 0.9% additional) on income exceeding the applicable threshold.
How Medicare Tax is Withheld and Reported
For employees, Medicare tax is collected through payroll withholding. This withheld amount is then reported on Form W-2, Wage and Tax Statement. Specifically, the total Medicare wages and tips are shown in Box 5, and the Medicare tax withheld is reported in Box 6 of Form W-2.
Self-employed individuals handle their Medicare tax obligations differently, as no employer withholds taxes. They pay self-employment taxes, including Medicare tax, through estimated tax payments throughout the year. These estimated payments are typically submitted quarterly using Form 1040-ES. At the end of the tax year, self-employed individuals calculate their final self-employment tax liability, including Medicare tax, on Schedule SE (Form 1040), Self-Employment Tax.