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Key takeaways
- Each employee, employer, and self-employed worker must pay Medicare Tax and Social Security tax, both parts of the Federal Insurance Contributions Act.
- The current tax rate for Medicare is 2.9%, split evenly between employer and employee.
- You may owe additional Medicare surtaxes if you earn a certain amount during the year.
What is medicare tax?
Medicare tax is part of the Federal Insurance Contributions Act (FICA). It supports hospital insurance costs, while Social Security taxes go toward old-age, survivors, and disability insurance costs.
Medicare is the federal health insurance program for people 65 and older or younger people with disabilities. Medicare is broken down into two components of essential medical services. The first Medicare part covers care for inpatient hospital stays, nurses for hospice care, and other home health needs. The second part pays for physician services, preventive screenings, and diagnostic tests.
Social Security tax and Medicare tax are FICA taxes. They’ll come out of your company’s revenue as payroll taxes.
Medicare taxes for employers, employees, and self-employed individuals
Medicare taxes can become a bit complicated, especially if you have a salary and earn self-employment income on the side. Here’s an overview of how it breaks down—multiple columns may apply to you.
What is the medicare tax rate?
Medicare tax is shared equally between employer and employee. The current Medicare tax rate is 2.9%, consisting of 1.45% for the employer and 1.45% for the employee.
The Social Security rate is 12.4% and follows an identical “split” process, so 6.2% is covered by the employer and 6.2% by the employees.
If you’re self-employed or both an employer and an employee of your business, you’ll pay 2.9% in Medicare taxes and 12.4% in Social Security taxes.
Medicare tax for employers
Employers need to withhold Medicare tax for their employees. The IRS requires all employers to use the EFTPS online system to make payroll tax deposits as part of their small business taxes.
You can report these payments via a quarterly federal tax return (Form 941) or an annual one (Form 944). Medicare tax withheld will also go on the W-2 sent annually to each employee as part of their employment taxes.
Medicare surtax
Depending on your and your employees’ wages, you may also be responsible for up to two Medicare surtax payments: Additional Medicare Tax and Net Investment Income Tax.
What is additional medicare tax?
High earners whose wages, compensation, or self-employment income exceed their filing status threshold must pay an Additional Medicare Tax.
The Additional Medicare Tax rate is 0.9%, but this extra Medicare tax is only on covered wages beyond the threshold.
Additional medicare tax as a self-employed individual
For example, let’s say you’re a self-employed individual and earned income of $300,000 in wages. As a single filer, you’d be subject to Additional Medicare Tax on all the money above $200,000.
First, multiply that $300,000 by .029, the Medicare tax rate for self-employed individuals. That’s $8,700.
You’d then take the $100,000 and multiply it by the Additional Medicare Tax rate of .009, or $900.
Add those two numbers together for a total of $9,600 in Medicare taxes. That’s the correct amount to report for the year in Medicare tax withholding when filing Form 8959.
Additional medicare tax as an employer
As an employer, you’re required to withhold the additional 0.9% beginning in the pay period where you start paying an employee at least $200,000. You’ll keep withholding Additional Medicare Tax at the rate of 0.9% in subsequent pay periods until the end of the year.
Here’s an example of how to calculate Medicare Tax. Assume you pay twice monthly, and you have an employee earning $270,000 for the year or $11,250 per pay period. They won’t hit the $200,000 mark until the 18th pay period of the year, and that’s when the additional Medicare tax kicks in.
For the first 17 pay periods, you’d deduct 1.45%, or $163.125, from their paycheck. You’d also pay $163.125 to cover the employer’s portion of the Medicare taxes. Then, starting with the 18th pay period, you’d add on the 0.9%, but only for the portion above $200,000 for the year.
In this case, the overage is $2,500. The entire $11,250 would again be taxed at 1.45%, but that additional $2,500 would also be subject to Additional Medicare Tax at the 0.9% rate. So, for this 18th period, you’d withhold an additional $22.50, for a total of $185.625.
The remaining pay periods for the year would have their total amounts taxed at 2.35%. In this scenario, the employer would continue withholding Additional Medicare Tax of $264.375 from each paycheck until the end of the calendar year.
The same logic applies to joint filers or married people filing separately, though they each have a certain threshold. You must report this Medicare surtax when the employee’s wages surpass $200,000. If the tax doesn’t actually apply to the employee, they can claim a credit when they’re filing their return.
The good news for employers: You’re not required to match the additional 0.9% when filing. You’ll still only pay 1.45% in Medicare tax throughout the year; you’ll just need to withhold for your high-earning employees.
Did all of that math stress you out? Try our Medicare tax calculator to see your breakdown of Social Security, Medicare, and additional Medicare tax amounts.
Per the Internal Revenue Service, here are the filing status thresholds:
- Married filing jointly: $250,000
- Married filing separately: $125,000
- Single, head of household, or qualifying widow(er) with a child: $200,000
Filing Additional Medicare tax is done through Form 8959.
What is net investment income tax?
If you have income from interest, dividends, capital gains, rentals and royalties, or non-qualified annuities, you may be liable for a Net Investment Income Tax (NIIT). The NIIT applies a 3.8% tax rate to net investment income above the statutory threshold amounts. This tax is in addition to capital gains taxes everyone must pay on their investments.
Similar to the Additional Medicare Tax, if your modified adjusted gross income (MAGI) is over the below thresholds and you’ve earned money from investments, you’ll pay 3.8% on whichever is less between your net investment income or the difference between your MAGI and your filing status threshold.
Here are the MAGI statutory threshold amounts:
- Married filing jointly: $250,000
- Married filing separately: $125,000
- Single or head of household: $200,000
- Qualifying widow(er) with a child: $250,000
Net investment income typically doesn’t include your regular wages, Social Security benefits, self-employment income, alimony, or unemployment compensation. See a complete list of what qualifies as net investment income here.
If you do owe net investment tax, you’ll file Form 8960.
How do self-employed individuals pay medicare tax?
If you plan to file taxes as a self-employed individual, you can pay via estimated tax payments. Doing so can soften your tax burden by breaking up payments throughout the year, which is especially helpful if your wages aren’t consistent from month to month. As the name suggests, calculating your estimated taxes is a bit of a guess, though you can use forecasts and the previous year for guidance.
Because self-employed individuals don’t have an employer to withhold taxes, they must follow the self-employment tax rate that includes Social Security and Medicare taxes.
That rate is 15.3%, which consists of Social Security (12.4%) and Medicare (2.9%) taxes. You’ll file Schedule SE (Form 1040) by April 15.
Not sure how much to put toward your quarterly payments? Here’s a guide for calculating your estimated taxes.
How Bench can help with paying your self-employment and medicare taxes
If you’re self-employed or running a small business, managing self-employment and Medicare taxes can feel like an overwhelming mountain to climb, but you’ve got Bench on your side. We can help take bookkeeping and filing taxes off your to-do list.
Our tax filing support includes estimated tax vouchers, removing the hassle of calculating self-employment tax and income tax on your own every quarter. Rather than doing guesswork, leave the calculating to your tax team at Bench and experience peace of mind as you know your tax payments to the IRS are correct.
When tax time comes around, we’ll complete your business tax filing. We can even do your personal tax filing, too, so you can spend more time on your business.
Ready to simplify your small business tax filing? Let’s get started.
