Medicare Taxes: An Overview for Employers

When you pay salaries, wages and commissions to staff, you’re also responsible for deducting taxes from your employees’ gross earnings. One of these employment taxes, known as the Medicare tax, helps fund the federal government’s national health insurance plan. Americans pay into this program and can access benefits when they turn 65.

 

Here’s what you need to know about the Medicare tax as an employer.

 

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What are Medicare taxes for?

Medicare is the federal government’s health insurance plan for Americans over the age of 65 and those with disabilities. It helps pay for essential medical services, including:

  • Inpatient hospital, skilled nursing, home health and hospice care (Medicare Part A)
  • Physician services, diagnostic tests and preventive screenings (Medicare Part B)

The Medicare tax helps pay for these health care expenses. The taxes are deposited in the Hospital Insurance Trust Fund, which is managed by the U.S. Treasury. The trust is used only to pay for Medicare Part A services and related administrative costs.

 

Other funding for Medicare comes from money approved by Congress, Medicare premiums paid by beneficiaries and income taxes.

 

Who pays the Medicare tax?

Employers, employees and self-employed individuals are required to pay a tax for Medicare.

 

The government sets the tax as a percentage of gross earnings, so the more an employee makes, the more you have to withhold. As an employer, you must also match the employee’s contribution.

 

Basic Medicare tax rates

The Medicare tax rate is set by the government each year. For 2020 and 2021, the rate is 2.9% of an employee’s gross wages, divided between employer and employee. This means you must:

  • Withhold 1.45% of an employee’s gross wages
  • Contribute a matching 1.45% of an employee’s gross wages

Example:

The Medicare tax for an employee earning gross income of $2,400 in a pay period is calculated as follows:

  • Employee’s share of Medicare tax: $2,400 x 1.45% = $34.80
  • Employer’s share of Medicare tax: $2,400 x 1.45% = $34.80
  • Total Medicare tax paid: $69.60

Additional Medicare Tax rates

When you pay an employee wages and compensation of more than $200,000 in a calendar year, the Additional Medicare Tax levy kicks in. You must deduct an extra 0.9% on gross earnings above this threshold.

 

The Medicare taxes for employees earning over $200,000 are as follows:

  • Earnings up to $200,000: 1.45%
  • Earnings exceeding $200,000: 2.35% (1.45% plus 0.9%)

Employers pay only the 1.45% basic Medicare tax and aren’t required to match the Additional Medicare Tax of 0.9%.

 

Calculating the Additional Medicare Tax on earnings over $200,000

Employers must start deducting the Additional Medicare Tax in the pay period in which an employee’s wages exceed $200,000. Continue applying this surtax in each subsequent pay period until the end of the calendar year.

 

Example #1:

An employee earning $30,000 per pay period makes a total of $180,000 in the first six pay periods of the year. The Additional Medicare Tax applies in the seventh pay period, when cumulative earnings total $210,000.

 

In this pay period, the basic Medicare tax of 1.45% applies to total gross earnings of $30,000. The Additional Medicare Tax applies to the portion exceeding $200,000, which is $10,000. Employers don’t have to match the 0.9% surtax.

  • Basic Medicare tax: 1.45% x $30,000 = $435
  • Additional Medicare tax: 0.9% x $10,000 = $90
  • Employee’s share of Medicare taxes: $525
  • Employer’s share of Medicare taxes: $435

Example #2:

Continuing with the example above, now that the employee has exceeded $200,000 in earnings, the Additional Medicare Tax applies to all subsequent earnings. In the next pay period, the Medicare taxes calculated on gross wages of $30,000 are as follows:

  • Employee’s share: 2.35% x $30,000 = $705
  • Employer’s share: 1.45% x $30,000 = $435

Remitting the tax for Medicare

When you’ve withheld taxes from employees’ wages, you’re responsible for paying both the employee and employer share to the U.S. Treasury. This deposit must be made through an electronic funds transfer (EFT). You can make the payment yourself or arrange for your tax professional, payroll service or a trusted third-party to make this deposit for you.

 

Frequently asked questions about the Medicare tax

 

Is the Medicare tax mandatory?

Yes, you’re legally required to collect and pay a tax for Medicare according to the Federal Insurance Contributions Act (FICA). FICA deductions help pay for both Medicare and Social Security programs.

 

It’s important to know that penalties can apply to an employer who doesn’t withhold and pay Medicare taxes. You can also be liable for Medicare taxes your employee doesn’t pay. Information about your tax responsibilities as an employer is available on the IRS website.

 

At what income level does the Medicare tax increase?

Once you pay an employee more than $200,000 in a calendar year, you must withhold the Additional Medicare Tax.

 

However, things look different from an employee’s perspective. The tax may or may not apply to them depending on their tax filing status and income thresholds. Individual taxpayers pay the Additional Medicare Tax when their earnings exceed:

  • $250,000 if married and filing jointly
  • $125,000 if married and filing separately
  • $200,000 if single
  • $200,000 if a qualifying widow or widower with a dependent child
  • $200,000 if a head of household (with qualifying person)

You must collect the Additional Medicare Tax from high-wage earners regardless of the employee’s filing status—even if an employee says the tax doesn’t apply to them and asks you not to withhold it. The employee can claim a credit for the tax collected on their income tax return.

 

What is the Medicare surtax for 2020 and 2021?

The Additional Medicare Tax is set at 0.9% of earnings exceeding $200,000 in a calendar year for 2020 and 2021. This levy is in addition to the 1.45% basic Medicare tax on all earnings.

 

This means the employee pays:

  • 1.45% on gross earnings up to $200,000
  • 2.35% on gross earnings exceeding $200,000 (1.45% plus 0.9%)

Employers are responsible for matching the 1.45% basic Medicare tax only.

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