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You may have noticed on your paychecks that some taxes are being withheld by the federal government, including Social Security and Medicare taxes. When you look at your W-2—your annual statement of wages earned and taxes paid—you may have noticed sections 5 and 6, Medicare wages and tips. These detail how much of your earnings are subject to Medicare taxes and how much tax has been withheld. Depending on your job, you may pay taxes not just on your wages, but also on tips and gratuities that you received.
Which Wages Are Subject to Medicare Taxes?
The total amount you’ve earned is taxable under the Federal Insurance Contributions Act (FICA), which covers:
- All wages, cash compensation, bonuses, and prizes
- Any non-cash benefit, including goods, services, or properties that your employer has given to you
- Imputed income, including child support
- Reimbursements for business expenses which are taxable
Regardless of how much or little you earn, 100% of your annual earnings are subject to Medicare taxes.
However, some pretax deductions are exempt from both Social Security and Medicare taxes, including:
- Contributions to your 401(k) and other retirement accounts
- Life insurance premiums
- Healthcare contributions
What Is the Medicare Tax Rate?
Both employees and employers pay Medicare taxes. The current rate for Medicare tax is 1.45% for the employee and 1.45% for the employer, which adds up to 2.9% total.
Medicare taxes have no wage base limit, which is the maximum amount of income earned that employees must pay tax on.
In contrast, you’ll pay additional Medicare taxes on any extra wages you earn over $200,000. The additional tax rate is 0.9% tax, which, when added to the 1.45% tax, makes a combined tax of 2.35% on those earnings. For example, if you made $245,000 last year, you’ll pay 1.45% on the first $200,000 that you made, plus an additional 2.35% on the last $45,000. Employers also don’t match additional Medicare taxes for individuals who make over $200,000.
Medicare tax and the self-employed
Self-employed workers are also required to pay the full 2.9% of Medicare taxes (instead of having employers pay half). However, they’re also able to deduct half of their Medicare and Social Security taxes when filing their income taxes.
Medicare tax and those who work multiple jobs
When you fill out your W-2 tax form, include all of your total earnings from the previous year. If you worked multiple jobs, input each job separately. If you work in the service industry and earn wages through tips, you’ll have to share the total amount that you made from tips in the previous year.
Are FICA Taxes Based on Your Gross or Net Income?
Both your Medicare and Social Security taxes are based on your gross income, i.e. before taxes are deducted. Therefore, your net income, or take-home pay, reflects the taxes which have already been deducted.
Why Do We Pay Medicare Taxes?
Medicare taxes are important as they help fund the Medicare health insurance program. Americans over the age of 65 are eligible for the program, as well as younger people with disabilities.
Medicare is a joint program between the federal and state governments, and helps to cover costs from three different distinct areas:
Hospital insurance
This can include inpatient hospital stays, care received in a nursing facility, and hospice care. Some forms of home healthcare can be covered under Medicare.
Medical insurance
This includes some doctor visits, different types of outpatient care, as well as some preventative treatments and the costs of medical supplies.
Prescription drugs
This covers the costs associated with prescription drugs, including vaccinations or other shots.
Recently, in light of the worldwide coronavirus pandemic, Medicare has been expanded to cover many other treatments and services for those affected by Covid-19. The CARES (Coronavirus Aid, Relief, and Economic Security) Act provides services like:
- Introducing telehealth services from Medicare
- Allowing Medicare certification for home healthcare services, including those provided by nurse practitioners and nurses
- Increasing Medicare coverage for hospital stays related to Covid-19
Related Tax Documents
You may also need to fill out a W-4 form, which informs your employer of your tax exemptions, marital status, and other deductions. This enables them to determine how much tax to withhold from your paycheck. The majority of employees fill out this form when they start working at a new company.
Conclusion
Medicare taxes are important contributions that help guarantee access to quality medical treatment. Employees are taxed 1.45% on their gross income for Medicare tax, and this will show up in boxes 5 and 6 of your W-2 form.
Taxable income includes all wages you’ve received, including tips, bonuses, non-cash compensation, and reimbursements from business expenses.
