Medicare Tax

Medicare tax is a US payroll tax used to fund the Medicare system. It is charged the rate of 2.9% on the total employment income half of which is deducted from the employee and half is the borne by the employer. Medicare tax is also called hospital insurance tax.

Medicare tax and the social security tax are collectively called the FICA (Federal Insurance Contributions Act) taxes. While the 2018 social security tax is charged at the rate of 12.4% on the maximum of actual employment income or $128,400, the Medicare tax is charged at 2.9% with no cap.

Half of the Medicare tax i.e. 1.45% is automatically deducted by the employer from its employee’s gross employment income i.e. salaries plus bonuses and the other half i.e. 1.45% is matched by the employer. Just like the social security tax, in case of self-employment, the whole 2.9% of Medicare tax is borne by the person engaged in self-employment.

You are only responsible to deduct Medicare tax in relation to income you pay to the employee. If he has any self-employment income or income from other employers, he is obligated to pay the differential taxes on his own.

IRS Form 941 is used to report the social security and Medicare taxes deducted and paid.

Additional Medicare Tax

Additional Medicare Tax is a Medicare tax charged on the employees only at the rate of 0.9% of the income exceeding a certain threshold (i.e. $200,000 for a single filer, $250,000 for a couple filing jointly and $150,000 for a married person filing separately).

For the purpose of Additional Medicare Tax, compensation includes wages, fringe benefits (i.e. non-cash benefits), tips, etc.

People subject to the Additional Medicare Tax must file Form 8959.

Formula

The following formulas can be used to work out the total Medicare tax, employee deduction and employer contribution:

$$ Total\ Medicare\ Tax=E\times2.9\% $$

$$ Medicare\ Tax\ -\ Employee=E\times1.45\% $$

$$ Medicare\ Tax\ -\ Employer=E\times1.45\% $$

Where E is the employment earnings for the period.

Example

You have two three employees: Joseph, Jane and John whom you pay $85,000, $150,000 and $220,000 per annum respectively.

The following table summarizes Medicare tax implications for you:

Employee Annual Employment Income Medicare Tax - Employee @ 1.45% Medicare Tax - Employer @ 1.45% Income Subject to AMT AMT
Joseph 85,000 1,233 1,233 - -
Jane 150,000 2,175 2,175 - -
John 220,000 3,190 3,190 20,000 180

Written by Obaidullah Jan, ACA, CFA and last modified on