What Is FICA Med Tax? A Breakdown for Taxpayers
Gain clarity on FICA Medicare tax. This guide explains how this federal payroll contribution is structured for various income situations, funding vital health programs.
The Federal Insurance Contributions Act (FICA) is a foundational U.S. federal payroll tax, funding two important government programs: Social Security and Medicare. While Social Security tax addresses retirement, disability, and survivor benefits, the Medicare tax component is specifically dedicated to supporting the Medicare program. This program provides health insurance coverage, primarily for individuals generally aged 65 or older, and also extends to certain younger people with qualifying disabilities. This article focuses on the intricacies of the Medicare tax, detailing its standard application, the additional tax for higher earners, and its unique considerations for self-employed individuals.
Understanding the Standard Medicare Tax
The standard Medicare tax rate is currently set at 2.9% of an individual’s earned income. This total rate is typically split between the employee and the employer, with each party contributing 1.45%. Unlike the Social Security tax, there is no annual wage base limit for Medicare tax, meaning it applies to every dollar of an employee’s wages, salaries, and tips. Employers are responsible for withholding the employee’s portion directly from each paycheck. Both the employee’s and the employer’s contributions are then remitted to the Internal Revenue Service (IRS) to fund the Medicare trust fund.
The Additional Medicare Tax
Beyond the standard contribution, certain high-income earners are subject to an Additional Medicare Tax of 0.9%, which is imposed solely on the employee’s share of Medicare wages, self-employment income, or railroad retirement (Tier 1) compensation that exceeds specific income thresholds. These thresholds vary based on filing status, set at $200,000 for single filers, heads of household, and qualifying widows, $250,000 for those married filing jointly, and $125,000 for married individuals filing separately. Employers are mandated to begin withholding this additional 0.9% tax from wages once an employee’s compensation surpasses $200,000 within a calendar year, irrespective of the employee’s marital or filing status. It is important to note that employers do not pay a matching portion for this Additional Medicare Tax. Employees whose combined income from various sources exceeds their applicable threshold may need to make estimated tax payments throughout the year to cover any shortfall not addressed by employer withholding.
Medicare Tax for Self-Employed Individuals
Individuals who are self-employed are responsible for both the employee and employer portions of Medicare tax, which is calculated as part of their Self-Employment Contributions Act (SECA) tax. The tax is specifically calculated on 92.35% of an individual’s net earnings from self-employment. A notable tax benefit for self-employed individuals is the ability to deduct one-half of their total self-employment taxes when calculating their adjusted gross income (AGI). This deduction helps to equalize the tax burden with that of traditional employees. These taxes are typically paid through quarterly estimated tax payments throughout the year, rather than through payroll withholding, and are reported on Schedule SE (Form 1040) when filing their annual income tax return.