Medicare Tax: What It Is, Who Has to Pay It, Current Rates

In calculating Additional Medicare Tax on self-employment income, an individual does not reduce the applicable threshold for the taxpayer’s filing status by the total amount of RRTA compensation. The Medicare tax rate is determined by the IRS and is subject to change. The Federal Insurance Contributions Act, or FICA, tax rate for earned income is 7.65% in 2023, which consists of the Social Security tax ( 6.20% ) and the Medicare tax ( 1.45% ). The Medicare tax is one of the federal taxes withheld from your paycheck if you’re an employee or that you are responsible for paying yourself if you are self-employed. The Social Security tax rate for 2023 is 12.4 percent on self-employment income up to $160,200. You do not pay Social Security taxes on earnings above that amount.

More information about this process of giving an employer money for taxes is available in Publication 531, Reporting Tip Income. F, who is married filing separate, has $175,000 in wages and $50,000 in self-employment income. Reduce the applicable threshold for the filing status by the total amount of Medicare wages received, but not below zero.

Employer

The tax imposed by section 1411 on an individual’s net investment income is not applicable to wages, RRTA compensation, or self-employment income. Thus, an individual will not owe net investment income tax on these categories of income, regardless of the taxpayer’s filing status. The Affordable Care Act (ACA) added an extra Medicare tax for high earners. As of January 2013, anyone with earned income of more than $200,000 ($250,000 for married couples filing jointly) has to pay an additional 0.9% in Medicare taxes beyond the standard 1.45%. This would further disconnect the additional Medicare tax from its root as an employment tax and continue the trend toward its becoming a surtax for higher income taxpayers.

As of 2023, the total Medicare tax rate is 2.9% of an employee’s eligible compensation, according to the Internal Revenue Service. In most situations, half of the Medicare payroll tax (1.45%) is paid by the employee, and half is paid by the employer. Medicare is a federal health insurance program consisting of three parts (A, B, and D). Most people don’t pay for Medicare Part A (hospital insurance) because its funded by taxpayer contributions to the Social Security Administration.

What is the Additional Medicare Tax for high earners?

There is no such cap for Medicare contributions; you pay the Medicare tax rate of 2.9 percent on all profits from self-employment. A portion of your SECA tax can be taken as a deduction elsewhere on your tax return. You pay in the form of Self-Employment Contributions Act (SECA) taxes, reported on your federal tax return.

Money gathered from the Additional Medicare tax is put toward the Affordable Care Act, also known as Obamacare. This website is using a security service to protect itself from online attacks. The action you just performed triggered the security solution. There are several actions that could trigger this block including submitting a certain word or phrase, a SQL command or malformed data. Business owners love Patriot’s award-winning payroll software. Get up and running with free payroll setup, and enjoy free expert support.

Railroad Retirement Tax Act Compensation

An additional 0.9 percent Medicare tax is imposed on self-employment earnings and wages of high-income taxpayers, above a threshold of $200,000 for single and head of household filers and $250,000 for joint filers. This tax is paid only by the employee in the case of employed workers, i.e., there is no matching share paid by the employer. In this case, the employer should have reported the amount of Additional Medicare https://turbo-tax.org/medicare-surtax-on-wages-and-self/ Tax withheld (including the overwithheld amount) on the employee’s Form W-2 for the prior year so that the employee may obtain credit for Additional Medicare Tax withheld. The imputed cost of coverage in excess of $50,000 is subject to social security and Medicare taxes, and to the extent that, in combination with other wages, it exceeds $200,000, it is also subject to Additional Medicare Tax withholding.

• To get the exemption, you must file IRS Form 4029, Application for Exemption from Social Security and Medicare Taxes and Waiver of Benefits, which you can obtain by calling TAX-FORM or going to

  Organizations electing exemptions.

• C and D are married filing separate spouses living in a community property state.
• Pretax deductions for contributions made by employees to group retirement plans such as 401(k)s can reduce wages that are subject to federal income tax, but they don’t reduce wages subject to Social Security or Medicare taxes.
• Employees paid their share when their employers deducted it from their paychecks.

A self-employment loss is not considered for purposes of this tax. RRTA compensation (which does not include non-qualified stock options granted to RR employees) is separately compared to the threshold. If you are an S-corporation shareholder, unlike a partner, your distributions from the organization generally do not count as self-employment income and are not subject to SECA tax. If you are a shareholder and also an officer of the company who performs substantial services, you are considered an employee.

Another option is paying the sum due when you file your return. Wages or net earnings greater than $200,000 (single), $250,000 (married), or $125,000 (married but filing separately) will now be taxed at an overall rate of 3.8 percent. The 0.9 percent rate increase applies only to the employee’s (or self-employed taxpayer’s) share of the Medicare tax. Unlike the social security tax, which has a “wage base” ceiling, there is no compensation limit.

There are no special rules for nonresident aliens or U.S. citizens and resident aliens living abroad for purposes of this provision. Medicare wages, railroad retirement (RRTA) compensation, and self-employment income earned by such individuals will also be subject to Additional Medicare Tax, if in excess of the applicable threshold for their filing status. If you have met the threshold for Additional Medicare Tax based on your filing status, wages, compensation, and self-employment income, it is possible that you will owe more or less Additional Medicare Tax than the amount that was withheld by your employer.

Starting with the 2013 tax year, you may be subject to an additional 0.9 percent Medicare tax on wages that exceed a certain threshold. The Additional Medicare Tax is charged separately from, and in addition to, the Medicare taxes you likely pay on most of your earnings. The tax applies to wages from employment, self-employment income and railroad retirement income, but if you are receiving W-2 income, the tax will most likely be withheld from your wages.

Uncollected taxes are not reported in boxes 4 and 6 of Form W-2. Unlike the uncollected portion of the regular (1.45%) Medicare tax, an employer may not report the uncollected Additional Medicare Tax in box 12 of Form W-2 with code N. Your employer must withhold Additional Medicare Tax on wages it pays to you in excess https://turbo-tax.org/ of $200,000 in a calendar year. Your employer cannot honor a request to cease withholding Additional Medicare Tax if it is required to withhold it. You will claim credit for any withheld Additional Medicare Tax against the total tax liability shown on your individual income tax return (Form 1040 or 1040-SR).

In 2013, a new tax called the Additional Medicare Tax was enacted that applies an additional rate of 0.9% to work-related compensation earned after 2012 that exceeds certain threshold amounts based on filing status. Your employer will begin withholding the additional Medicare tax once your wages reach a certain amount. Withholding starts when your wages and other compensation are more than $200,000 for the year. This is true even if you won’t be liable for the additional Medicare tax when you file your return. On top of the standard Medicare tax, high-income earners pay the Additional Medicare Tax of 0.9%.

First, employers do not contribute to the Additional Medicare Tax. All covered wages are subject to Medicare tax and there is no wage base limit. For more information, see Publication 15, (Circular E), Employer’s Tax Guide from the IRS. Some taxpayers are required to pay an additional 0.9% tax over and above the “regular” Medicare tax. Read on to learn more about this Medicare tax, including the rates, rules, and more.