Medicare Tax

Definition

The Medicare Tax is a component of the Federal Insurance Contributions Act (FICA), which funds hospital insurance for individuals in the United States. It is imposed on compensation and self-employment earnings at a rate of 2.9%. Employers are responsible for withholding half of this tax (1.45%) from employees’ wages and contribute the remaining half. Self-employed individuals, on the other hand, account for the full 2.9% in their quarterly estimated income tax payments.

Examples

Employee Example: An employee earning $50,000 annually will have $725 (1.45%) withheld from their paycheck for Medicare tax. The employer will also contribute an additional $725, matching the employee’s contribution.
Self-Employed Example: A self-employed individual with annual earnings of $50,000 will need to pay 2.9% of their earnings in Medicare tax, equating to $1,450, as part of their quarterly estimated tax payments.

Frequently Asked Questions (FAQs)

Q1: Who is required to pay Medicare tax? A1: Both employees and employers are required to pay Medicare tax, as are self-employed individuals.

Q2: How is the Medicare tax rate divided between employers and employees? A2: The tax rate is 2.9% of earnings. Employers withhold 1.45% from employee wages and match this with a 1.45% contribution.

Q3: Does Medicare tax apply to all earnings? A3: Yes, the Medicare tax is levied on all earnings without an upper limit, unlike Social Security tax which has a wage base limit.

Q4: How do self-employed individuals pay Medicare tax? A4: Self-employed individuals pay the full 2.9% Medicare tax as part of their quarterly estimated income tax payments.

Q5: Are there any additional Medicare tax obligations? A5: Yes, high-income earners may be subject to an additional 0.9% Medicare tax on wages, compensation, and self-employment income exceeding certain thresholds ($200,000 for individuals, $250,000 for married couples filing jointly).

Federal Insurance Contributions Act (FICA): A U.S. federal payroll tax imposed on both employees and employers to fund Social Security and Medicare.
Self-Employment Tax: Tax comprising Social Security and Medicare taxes for individuals who work for themselves.
Estimated Income Tax Payments: Periodic tax payments made by self-employed individuals to cover their tax liability on income and self-employment earnings.

Online Resources

Suggested Books for Further Studies

“Taxing Ourselves: A Citizen’s Guide to the Debate Over Taxes” by Joel Slemrod and Jon Bakija
“The Tax and Legal Playbook: Game-Changing Solutions to Your Small Business Questions” by Mark J. Kohler
“J.K. Lasser’s Your Income Tax Professional Edition 2021” by J.K. Lasser Institute

Fundamentals of Medicare Tax: Accounting Basics Quiz

### What is the total percentage of Medicare tax paid on compensation and self-employment earnings? - [ ] 1.45% - [ ] 3.9% - [x] 2.9% - [ ] 1.2% > **Explanation:** The total percentage of Medicare tax paid on compensation and self-employment earnings is 2.9%. Employers and employees each pay 1.45%, while self-employed individuals pay the full 2.9%. ### What portion of Medicare tax must an employer withhold from an employee's wages? - [x] 1.45% - [ ] 2.9% - [ ] 1.2% - [ ] 0.9% > **Explanation:** An employer must withhold 1.45% of an employee's wages for Medicare tax. They will match this with an additional 1.45% contribution. ### How do self-employed individuals account for their Medicare tax? - [ ] Through annual tax filings. - [x] Through quarterly estimated income tax payments. - [ ] By withholding from personal income. - [ ] Through monthly installments. > **Explanation:** Self-employed individuals pay the full 2.9% Medicare tax through their quarterly estimated income tax payments. ### Is there a wage upper limit for the Medicare tax unlike the Social Security tax? - [ ] Yes - [x] No - [ ] Only for employers - [ ] Only for individuals > **Explanation:** Unlike the Social Security tax which has a wage base limit, the Medicare tax applies to all earnings without an upper limit. ### What additional Medicare tax applies to high-income earners? - [x] 0.9% - [ ] 1.2% - [ ] 2.9% - [ ] 3.8% > **Explanation:** High-income earners are subject to an additional 0.9% Medicare tax on wages, compensation, and self-employment income exceeding specified thresholds. ### What does FICA stand for? - [ ] Federal Insurance and Compensation Act - [ ] Federal Income Compensation Authorities - [x] Federal Insurance Contributions Act - [ ] Future Investment Contributions Agreement > **Explanation:** FICA stands for Federal Insurance Contributions Act, which includes taxes for Social Security and Medicare. ### What is the standard threshold for the additional 0.9% Medicare tax for married couples filing jointly? - [ ] $200,000 - [x] $250,000 - [ ] $150,000 - [ ] $100,000 > **Explanation:** The threshold for the additional 0.9% Medicare tax for married couples filing jointly is $250,000. ### Who is responsible for matching the employee's Medicare tax contribution? - [ ] The employee - [x] The employer - [ ] The IRS - [ ] The state government > **Explanation:** The employer is responsible for matching the employee's 1.45% Medicare tax contribution with an additional 1.45%. ### In addition to Medicare Tax, what other tax is under FICA? - [ ] Excise Tax - [ ] Property Tax - [x] Social Security Tax - [ ] Capital Gains Tax > **Explanation:** In addition to Medicare Tax, the Federal Insurance Contributions Act (FICA) also includes the Social Security Tax. ### At what income level for an individual does the additional Medicare tax of 0.9% start to apply? - [x] $200,000 - [ ] $150,000 - [ ] $250,000 - [ ] $500,000 > **Explanation:** The additional 0.9% Medicare tax applies to individuals earning over $200,000 annually.

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