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Medicare Tax Definition

What Is Medicare Tax?

Medicare tax, also positive as “hospital insurance tax,” is a federal employment tax that funds a portion of the Medicare insurance program. Like Social Gage tax, Medicare tax is withheld from an employee’s paycheck or paid as a self-employment tax.

Medicare tax pays for Part A of the Medicare program, which encompasses hospital insurance for individuals age 65 or older and people who have certain disabilities or medical conditions. Medicare clinic insurance covers hospital visits, hospice and nursing home care, and some home healthcare.

Key Takeaways

  • Medicare saddles fund hospital, hospice, and nursing home expenses for elderly and disabled individuals.
  • In 2021 the Medicare tax rate is 2.9%, which is split between an wage-earner and their employer.
  • Self-employed individuals are responsible for both portions of Medicare tax but only on 92.35% of business earnings.
  • There are two additional Medicare surtaxes that seek to certain high earners.

How Medicare Tax Works

Just about anyone who works in the U.S. is required to pay Medicare taxes. Below the Federal Insurance Contributions Act (FICA), employers are required to withhold Medicare tax and Social Security tax from employee’s paychecks. In addition, the Self-Employed Contributions Act (SECA) mandates that self-employed workers pay Medicare tax and Social Security tax as part of their self-employment tax.

Medicare assesses and Social Security taxes are put into trust funds held by the U.S. Treasury. Medicare tax is kept in the Hospital Insurance Hand over Fund and is used to pay for Medicare Part A. Costs of Medicare Part B (medical insurance) and Medicare Part D (prescription soporific coverage) are covered by the Supplemental Medical Insurance Trust Fund, which is funded with premiums paid by beneficiaries, tax gate, and investment earnings.

The money is intended to be used for both current and future Medicare beneficiaries. However, the Hospital Indemnity Trust Fund has been facing solvency and budget pressures and is expected to be exhausted by 2026, according to the 2019 Trustees Give an account of. If this happens, Medicare services may be cut, or lawmakers may find other ways to finance these benefits.

In 2020 the Coronavirus Aid, Abatement, and Economic Security (CARES) Act expanded the Medicare program to cover treatment for individuals affected by the COVID-19 pandemic. This comprehended increased Medicare payments for hospital stays and durable medical equipment related to COVID-19.

2021 Medicare Tax Rates

In 2021 the Medicare tax reprimand is 2.9%, which is split evenly between employers and employees. W-2 employees pay 1.45% and their employer covers the outstanding 1.45%. Self-employed individuals, as they are considered both an employee and an employer, must pay the full 2.9%. Unlike Public Security tax, there is no income limit to which Medicare tax is applied.

An individual’s Medicare wages are subject to Medicare tax. This habitually includes earned income such as wages, tips, vacation allowances, bonuses, commissions, and other taxable helps up to $200,000.

Medicare Surtaxes

In 2013 the Affordable Care Act (ACA) introduced two Medicare surtaxes to fund Medicare expansion: the additional Medicare tax and the net investment receipts tax. These surtaxes both apply to high earners, and they are specific to different types of income. It is possible for a taxpayer to be substance to both Medicare surtaxes.

Additional Medicare Tax

The additional Medicare tax applies to individuals whose earned income—involving wages, compensation, and self-employment income—exceeds certain thresholds. For example, single filers who earn more than $200,000 and match up couples filing jointly who earn more than $250,000 are subject to additional Medicare tax.

The additional Medicare tax class is 0.9%. However, the additional 0.9% only applies to the income above the taxpayer’s threshold limit. For example, if you bring in $225,000 a year, the first $200,00 is subject to Medicare tax of 1.45% and the remaining $25,000 is subject to additional Medicare tax of 0.9%.

Match the initial Medicare tax, the surtax is withheld from an employee’s paycheck or paid with self-employment taxes. However, there is no employer-paid carve up of the additional Medicare tax. The employee is responsible for paying the full 0.9%.

Net Investment Income Tax

The net investment income tax, also known as the “unearned return Medicare contribution surtax,” is an additional 3.8% tax applied to net investment income. Like the additional Medicare tax, there is no employer-paid allot.

Net investment income may include taxable interest, dividends, nonqualified annuities, capital gains, and rental income. It does not number income that is already excluded for income tax purposes, such as tax-exempt municipal bond interest. Net investment return tax is applied to an individual’s net investment income, or the excess modified adjusted gross income (MAGI) over certain beginnings, whichever is less.

For example, let’s say a married couple filing jointly earned $225,000 in wages. During the same tax year, the duo also received $50,000 in investment income, bringing their MAGI to $275,000. The net investment income tax threshold for fit couples filing jointly is $250,000. The couple is required to pay 3.8% tax on the lesser of the excess MAGI ($25,000) or the total amount of investment receipts ($50,000). In this case the couple would owe net investment income tax of $950 (3.8% x $25,000). 

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