What Is the MEDHI Tax on My Paycheck?
Demystify the 'MEDHI' deduction on your pay stub. Learn how Medicare tax works, its purpose, and who contributes to this essential healthcare funding.
When reviewing your paycheck, you may notice a deduction labeled “MEDHI” or similar abbreviations. This refers to the Medicare tax, specifically the Hospital Insurance (HI) component. This tax is a mandatory payroll deduction established under the Federal Insurance Contributions Act (FICA), funding federal programs.
Understanding Medicare Tax
Medicare tax is a federal employment tax that funds Medicare’s Hospital Insurance (Part A) program. This program covers costs for inpatient hospital care, skilled nursing facility care, hospice care, and certain home health services for eligible individuals, including those aged 65 or older and younger people with certain disabilities. Both employees and their employers contribute to this tax. The employee’s share is withheld directly from paychecks, while the employer matches that contribution.
Calculating Standard Medicare Tax
The standard Medicare tax is calculated at a rate of 1.45% for employees, with employers contributing an additional matching 1.45%. Unlike the Social Security tax, there is no wage base limit for Medicare tax; all earned income is subject to it. For instance, if an employee earns $2,000 in gross wages during a pay period, the Medicare tax withheld from their paycheck would be $29.00 ($2,000 0.0145). This deduction appears on your pay stub as “Medicare” or “Med” and is remitted to the government by your employer.
The Additional Medicare Tax
Beyond the standard Medicare tax, high-income earners are subject to an Additional Medicare Tax. This extra 0.9% tax applies to earned income above specific thresholds. These thresholds vary by tax filing status: $200,000 for single filers, heads of household, and qualifying widow(er)s; $250,000 for those married filing jointly; and $125,000 for those married filing separately. This additional tax applies only to the employee’s portion; employers do not match this 0.9% amount.
Employers are required to begin withholding this Additional Medicare Tax once an employee’s wages exceed $200,000 in a calendar year, irrespective of the employee’s filing status. This means an employer will withhold the standard 1.45% plus the additional 0.9% (totaling 2.35%) on wages paid above the $200,000 threshold. While employers withhold based on individual wages, the ultimate liability is determined by the taxpayer’s total income and filing status when they file their annual income tax return. If an employee’s total income and filing status result in a lower liability than the amount withheld, any overpayment is credited against their total tax liability.
Medicare Tax for Self-Employed Individuals
Self-employed individuals are responsible for both the employee and employer portions of Medicare tax under the Self-Employment Contributions Act (SECA). This means they pay the full 2.9% for the standard Medicare tax. If their income exceeds the thresholds for the Additional Medicare Tax, self-employed individuals also pay the extra 0.9% on the applicable earnings.
Self-employed individuals calculate and pay their self-employment taxes, including Medicare, when filing their annual income tax returns, using Schedule SE, Self-Employment Tax. A provision for self-employed individuals is the ability to deduct one-half of their self-employment taxes as an adjustment to income when calculating their adjusted gross income (AGI). This deduction helps to offset the burden of paying both the employee and employer portions of these taxes.