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Understanding the Medicare Tax

Bobby Brock Insurance will help you understand the Medicare tax

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Have you heard of the Medicare tax? If so, maybe you’ve wondered why you pay it. Bobby Brock Insurance is here to explain.

What the Medicare Tax Is

It’s a payroll tax that pertains to all earned income and funds your health coverage when you qualify for Medicare. The tax is automatically taken out of your paycheck every month and is a levy on what you earn — including tips, wages, select Railroad Retirement Tax Act (RRTA) benefits, and self-employment revenue that lands above a certain amount. There’s no minimum income limit, and all people who work in the U.S. must pay this tax on their earnings.  

Who Pays the Medicare Tax

In general, all employees who work in America have to pay the Medicare tax, no matter the citizenship or residency status of the employer or the employee.

In some situations, you might have to pay the tax on income earned outside of the U.S. Your employer can attest to this. If Medicare taxes are hidden from your paycheck by mistake, contact your employer, asking for a refund.    

Who Determines the Medicare Tax

The Internal Revenue Service (IRS) determines the Medicare tax rate, which is susceptible to change. However, the Federal Insurance Contributions Act (FICA) tax rate for earned income has stayed at 7.65% in 2020. It was the same in 2018 and 2019. This includes the Social Security tax of 6.2% and the Medicare rate of 1.45%.  

Again, the Medicare tax is one of the federal taxes retained from your paycheck — if you’re an employee or that you must pay yourself if you’re self-employed. 

Related Post: Medicare and Social Security: How Do They Work Together?

Self-Employed Folks Will Pay a Higher Rate

Self-employed individuals will pay a higher tax rate because they’ll need to pay both the employee share and the portion that’s typically paid by their employer. You can contact Social Security or visit IRS.gov to get the current self-employment tax rate. 

The Additional Medicare Tax

The Affordable Care Act added the Additional Medicare Tax, which requires higher wage earners to pay an extra 0.9% on earned income. A person owes Additional Medicare Tax on all collective wages, compensation, and self-employment earnings — once the total sum surpasses the threshold for their filing status.

Who Pays It?

Individuals must pay the Additional Medicare Tax if their sole wages, compensation, and self-employment income (combined earnings if married and filing a joint return) top these maximum amounts: 

Filing StatusMaximum Amount
Married — filing together$250,000
Married — filing separately$125,000
Single, head of household, or qualifying widow(er) with dependent child$200,000

Related Post: What Will Be My Out-Of-Pocket Costs for Medicare?

How It Works – An Example

Single people may have a maximum income of $200,000 before they’re liable to the Additional Medicare Tax. So, if the cumulative income surpasses that amount, they’ll then have to pay that additional 0.9%. According to eHealth Medicare, all wages currently liable to the Medicare payroll Tax are also liable to the Additional Medicare Tax. 

For all your Medicare-related questions, keep browsing our site or call (662) 844-3300. 

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