Legal Definitions - Medicare Tax

Medicare Tax

The Medicare Tax is a mandatory payroll tax in the United States that helps fund the federal government's Medicare program. Medicare provides health insurance primarily for individuals aged 65 or older, as well as some younger people with disabilities. This tax is one component of the Federal Insurance Contributions Act (FICA) tax, with the other being the Social Security tax.

Both employees and employers contribute to the Medicare Tax. Generally, employees have 1.45% of their gross wages withheld from their paychecks for this tax. Employers then match this amount, contributing an additional 1.45% on behalf of their employees. This means a total of 2.9% of an employee's wages is contributed to Medicare through these combined payments.

For high-income earners, an Additional Medicare Tax of 0.9% applies to wages, self-employment income, and railroad retirement (Tier 1) compensation that exceeds certain thresholds. These thresholds are $200,000 for single filers, $250,000 for married couples filing jointly, and $125,000 for married individuals filing separately.

Here are some examples to illustrate how the Medicare Tax works:

• Example 1: Standard Employee Contribution

  Sarah works as a graphic designer and earns $60,000 per year. Each pay period, her employer withholds 1.45% of her gross wages for Medicare Tax. If she earns $2,500 in a bi-weekly pay period, $36.25 (1.45% of $2,500) will be deducted from her paycheck and sent to the IRS to fund the Medicare program. This illustrates the standard employee contribution that is a regular deduction for most workers.

• Example 2: Employer's Matching Contribution

  A small business, "Green Thumb Landscaping," employs five full-time workers. For each employee, Green Thumb Landscaping is legally required to pay an additional 1.45% of their wages as the employer's share of the Medicare Tax. So, if an employee earns $40,000 annually, the business itself contributes $580 (1.45% of $40,000) directly to the Medicare program, separate from the amount withheld from the employee's pay. This demonstrates how employers share the financial responsibility for funding Medicare.

• Example 3: High-Income Earner with Additional Medicare Tax

  Dr. Alex Chen is a surgeon who earns $300,000 annually as a single filer. For the first $200,000 of his income, he pays the standard 1.45% Medicare Tax. However, on the $100,000 of income exceeding the $200,000 threshold ($300,000 - $200,000), an additional 0.9% Medicare Tax applies. This means he pays 1.45% on $300,000 and an extra 0.9% on $100,000, totaling a higher overall Medicare contribution than someone earning below the threshold. This example highlights the application of the Additional Medicare Tax for individuals with higher incomes.