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Medicare Tax

2.9% Medicare tax expanded to 3.8% for higher-income taxpayers

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The United States government imposes a Medicare tax of 2.9% on wages received by an employee and on business or farming income earned by self-employed individuals. Starting in the year 2013, Medicare taxes will be increased by an additional 0.9% to 3.8% for higher-income individuals.

 

Medicare Hospital Insurance Tax

Medicare taxes are imposed at a flat tax rate of 2.9% on wages, salaries, and business or farming income earned by self-employed individuals. There's no limit on the amount wages subject to Medicare taxes, unlike the annual wage limit for Social Security taxes.

The medicare hospital insurance tax is paid half by employees through payroll deductions and half by the employer. Accordingly, employees pay a Medicare tax rate of 1.45% (half of the 2.9% rate).

Self-employed persons pay both halves of the Medicare tax since they are both the employee and the employer. However, self-employed persons are allowed to deduct half of the Medicare tax as an adjustment to income. Self-employed persons calculate and pay their Medicare tax when filing their personal tax return as part of the self-employment tax.

Additional Medicare Taxes for 2013 and Beyond

Starting in the year 2013, the Medicare tax will be expanded. An additional Medicare tax of 0.9% applies to Medicare wages and to net self-employment income over a threshold amount. The threshold amounts are:

Additional Medicare Tax Thresholds

Filing status

Wages and/or Self-Employed Income in Excess of

Married Filing Jointly

 $250,000

Single or Head of Household or Qualifying Widow(er)

 $200,000

Married Filing Separately

 $125,000

Payroll Withholding Authorized in Anticipation of the Additional Medicare Tax

Employers are required to withhold an additional 0.9% on employee's wages in excess of the threshold amounts. Also, employers might not always know if an employee is subject to this additional Medicare tax. The additional Medicare tax will be calculated on an individual's personal income tax return, and any shortfall not covered by withholding will need to be paid by the individual. Employers, however, may be subject to penalties and interest for not withholding the additional Medicare tax.

The Unearned Income Medicare Contribution Tax for 2013 and Beyond

Starting in the year 2013, an unearned income Medicare contribution tax of 3.8% applies to the lower of net investment income or modified adjusted gross income over a threshold amount. The threshold amounts are:

Net Investment Income Tax Thresholds

Filing status

Modified Adjusted Gross Income

Married Filing Jointly or Qualifying Widow(er) 

 $250,000

Single or Head of Household

 $200,000

Married Filing Separately

 $125,000

 

 

Source materials:
  1. About.com
  2. Money
  3. Tax Planning: U.S.
  4. Business Taxes
  5. Payroll
  6. Medicare Tax

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