Medicare Tax

Medicare tax is a United States federal payroll tax that pays for Medicare Part A, the hospital insurance program for people aged 65 and over and for some younger people with disabilities. It is one of the two parts of the payroll tax charged under the Federal Insurance Contributions Act, the other being the Social Security tax. Employers withhold the employee's share from each paycheck and pay a matching share themselves, and both amounts are deposited with the Internal Revenue Service (IRS).

Unlike the tax that funds Social Security, the Medicare tax has no annual wage cap: it applies to every dollar of wages. Since 2013 high earners have also paid an Additional Medicare Tax, introduced by the Affordable Care Act. For accountants, Medicare tax is part of the routine calculation of withholdings, employer payroll taxes and the related liabilities.

• Employee share: 1.45 percent of all gross wages, with no maximum.
• Employer share: a matching 1.45 percent of all wages.
• Additional Medicare Tax: 0.9 percent of wages above $200,000 in a calendar year, paid by the employee only. Employers must begin withholding it once an employee's wages pass $200,000, regardless of filing status, although the final liability depends on thresholds of $250,000 for married couples filing jointly and $125,000 for married individuals filing separately.
• Self-employed people pay both halves, 2.9 percent of net earnings, through self-employment tax, plus the additional 0.9 percent above the thresholds. They can deduct the employer-equivalent half when calculating income tax.

The wage cap on Medicare tax was removed from 1994. A separate 3.8 percent net investment income tax, also introduced in 2013, applies to certain investment income of higher earners and is sometimes loosely called a Medicare tax, but it is not a payroll tax.

An executive is paid $230,000 in a calendar year in equal monthly amounts. The regular Medicare tax is:

Here $\text{Wages}$ is total Medicare wages for the year; the second term applies only to wages above $200,000. The employee owes $230,000 times 0.0145, which is $3,335, plus 0.9 percent of $30,000, which is $270, for a total of $3,605 withheld. The employer pays only the matching $3,335, because it does not match the Additional Medicare Tax. In the months before the executive's year-to-date wages pass $200,000, the payroll system withholds only the 1.45 percent rate.

When payroll is processed, the employee's withheld Medicare tax is credited to a liability account, often combined with Social Security as FICA taxes payable, and the employer's matching share is debited to payroll tax expense. Both remain current liabilities until deposited, alongside federal income tax withholdings payable. Deposits follow the monthly or semiweekly schedules in IRS Publication 15, known as Circular E, and amounts are reported quarterly on Form 941 and annually to employees on Form W-2. At a period end that falls between payroll dates, the employer's share of Medicare tax on unpaid wages should be included in accrued payroll.

Common errors include stopping Medicare withholding when an employee reaches the Social Security wage base, failing to start the 0.9 percent withholding at $200,000, and matching the additional tax on the employer side, which overstates expense. Some fringe benefits are taxable wages for Medicare purposes, while certain pre-tax deductions, such as health insurance premiums under a cafeteria plan, are excluded, so the Medicare wage base can differ from income tax wages. Medicare tax is separate from the federal unemployment tax (FUTA), which the employer alone pays, and from income tax withholding.

• Internal Revenue Service: Social Security and Medicare withholding rates
• Internal Revenue Service: Additional Medicare Tax