Part of an employer’s payroll responsibilities is to handle the deduction and payment of their employees’ taxes. One of these is the Medicare tax, which is 2.9% of the employee’s gross earnings (as of writing this). The equivalent amount is split between employers and their workers, each paying 1.45%. However, there are instances where the Medicare employee tax is higher than what employers have to pay.
To know more, read on as we take a closer look at this mandatory payroll tax. Aside from providing answers to common “What is Medicare tax” questions, this guide will cover Medicare tax calculations and payment schedules.
Key Takeaways
- Medicare tax is used to fund part of the Medicare program
- The Medicare tax rate is 2.9% of the employee’s gross wages, split evenly between the employer and worker
- An additional Medicare employee tax of 0.9% may apply to high-earning workers who exceed a $200,000 annual salary threshold
- There is no employer-share for the additional Medicare tax
Medicare Tax Overview
Medicare tax is a federal payroll tax that employees and employers share. It is used to fund a portion of Medicare (specifically Part A), the US government’s national health insurance program, which helps cover the healthcare costs of people over the age of 65 and those with certain disabilities or medical conditions.
Workers pay their share through Medicare tax deductions made from their paychecks. Employers pay their share through tax payments made directly to the government, which also includes the applicable employee-share amounts withheld from their workers’ paychecks.
Under the Federal Insurance Contributions Act (FICA), all US employers are required to deduct and remit Medicare tax, as well as Social Security tax. Failure to comply can result in penalties. To know more, check out our guides to FICA and payroll compliances.
Medicare Tax Rates
The Medicare tax rate is 2.9% of an employee’s earned wages (as of this writing). Workers shoulder 1.45%, while employers contribute a matching 1.45%. Note that Medicare tax doesn’t have wage limits—meaning these are deducted from the employee’s gross salary, regardless of the amount.
Self-employed individuals are also subject to Medicare taxes. They shoulder both the employee and employer shares—or the full 2.9%. Unlike employees whose payroll taxes are remitted to applicable government agencies by their employers, self-employed workers have to report this on their own, along with filing self-employment taxes.
Did You Know? Medicare taxes are considered payroll taxes—not income taxes. To find out the differences between the two, check out our payroll taxes vs income taxes article.
Additional Medicare Taxes for High-wage Earners
Aside from the regular Medicare employee tax of 1.45%, high-wage earners have to pay an Additional Medicare Tax of 0.9%. The rate is applied to the portion of the workers’ earnings that will exceed the below thresholds. However, once the additional Medicare Tax has been withheld, the IRS mandates all employers to continue deducting the 0.9% every pay run until the calendar year ends. Note that employers are not required to match the additional rate.
Filing Status | Threshold |
|---|---|
Single | $200,000 |
Head of Household (with qualifying person) | $200,000 |
Qualifying Widow(er) with Dependent Child | $200,000 |
Married Filing Jointly | $250,000 |
Married Filing Separate | $125,000 |
Tracking the tax filing status of employees when computing Medicare can be complicated. To keep it simple, the Internal Revenue Service (IRS) requires withholding the Additional Medicare Tax in the pay period when the worker’s annual salary exceeds $200,000, regardless of the individual’s tax filing status. If the Additional Medicare Tax is more than what has been deducted at the end of the calendar year, employees can claim a credit with the IRS by filing Form 1040 or 1040 SR.
How to Compute Medicare Tax
Computing Medicare tax is very easy. Let’s say an employee’s gross earnings per pay period is $2,000. The calculation would be:
$2,000 X 0.0145 = $29
With the above example, $29 will be deducted from the employee’s gross salary per pay run. As an employer, you contribute a matching $29 per pay period for the employee’s Medicare.
Calculating the Additional Medicare Tax
Let’s say that your single employee makes $35,000 per monthly payroll. For the first five months of the calendar year, the employee earns $175,000. This is still subject to the regular Medicare tax.
The Additional Medicare tax will only apply in the sixth monthly pay period—when the cumulative earnings reach $210,000. However, it will only be imposed on the portion that exceeds the threshold (which is $10,000 in this example). Further, for subsequent pay runs, the rate will be added to the regular Medicare tax (0.9% + 1.45% = 2.35%) and withheld until the end of the calendar year.
The calculations would be:
Earned Wages (if earning $35,000 per monthly payroll) | Regular Medicare Tax Computation | Additional Medicare Tax Computation | Medicare Taxes For Deduction |
|---|---|---|---|
$175,000 for the first five months of the calendar year | $35,000 X 0.0145 = $507.50 | N/A | $507.50 per monthly payroll (for the first five pay runs) |
$210,000 on the sixth month of the calendar year | $35,000 X 0.0145 = $507.50 | $10,000 X 0.009 = $90 (only $10,000 is subject to this tax) | $507.50 + $90 = $597.50 (for the sixth monthly pay run only) |
Subsequent Monthly Pay Runs (until end of the calendar year) | |||
$245,000 and more on the seventh to 12th month | $35,000 X 0.0235 = $822.50 per monthly payroll (for the remaining pay runs of the year) | ||
Note that these computations only show the employee share. As an employer, you only need to match the 1.45% portion of the worker’s Medicare tax dues (or $507.50 per monthly payroll in the above example).
Remitting Medicare Taxes
Similar to federal income taxes and Social Security payments, you can remit Medicare taxes via the Electronic Federal Tax Payment System (EFTPS). Depending on your FICA tax liability during your “lookback period,” which runs from July 1 to June 30 of the previous year, your schedule to deposit Medicare taxes can either be:
- On a semi-weekly basis: If your total tax liability for all four quarters within the lookback period exceeds $50,000
- On a monthly basis: If your total tax liability for all four quarters within the lookback period is $50,000 or less
You need a Federal Employer Identification Number (FEIN or EIN) if you want to remit taxes via EFTPS. You can get an EIN with the IRS, but if you’re unsure what to do, our guide on how to get an EIN contains helpful tips.
Frequently Asked Questions (FAQs) About Medicare Taxes
Medicare taxes are imposed on all types of gross taxable income, such as salaries, overtime pay, tips, and bonuses.
All US employers and employees, including self-employed individuals, are required to pay Medicare taxes.
The Medicare employee tax and the applicable employer share help fund Medicare. This program provides access to cheaper health insurance or hospital coverage when American citizens reach the age of 65 or meet the medical and disabled conditions specified under Medicare.
Bottom Line
Medicare taxes are just one of the payroll taxes that both the employee and employer are responsible for paying. Knowing how much to pay, who pays this, and when the payments should be remitted are critical for those who employ and pay workers. Not only will it help you to avoid penalties for late or incorrect payments, but will ensure compliance to tax and labor regulations.
If you don’t have an in-house HR or payroll staff to calculate and handle Medicare taxes for you, consider partnering with a payroll provider for small business owners. Check out our best payroll services and top payroll software guides to find suitable options.
