If you’ve ever looked at a pay stub or your end-of-year W-2 form, you may have wondered what all those deductions were. One of these line items is the Medicare Tax. And, if your income is above a certain threshold, you may also see the Additional Medicare Tax. Then, of course, there are Social Security and FICA. In this post, we explain which payroll taxes help pay for the Medicare benefits you rely on.
How Much Is the Medicare Tax?
The Medicare Tax is 2.9 percent of your income, with you and your employer splitting the cost (1.45 percent each). That means you and your employer each pay $1.45 for every $100 in earned income. Self-employed people are responsible for the entire 2.9 percent.
There is no “wage base limit” for the Medicare Tax the way there is for the Social Security Tax (commonly known as FICA – more on that in a moment). Instead, you pay that same 1.45 percent on all earned income.
What Is the Additional Medicare Tax?
The Additional Medicare Tax is a provision of the Affordable Care Act. This payroll tax takes an additional 0.9 percent of your income. It went into effect in 2013.
You are only responsible for paying the Additional Medicare Tax if your income exceeds the following thresholds:
- Married filing jointly: $250,000
- Married filing separately: $125,000
- Single: $200,000
- Head of household (with qualifying person): $200,000
- Qualifying widow(er) with dependent child: $200,000
This tax is applied to the same wages as the Medicare Tax. The amount paid is just under 1 penny for every $100 in earnings that exceed the thresholds listed above. That means you do not pay the Additional Medicare Tax unless and until your wages exceed one of those amounts.
For example, if you file as “married filing jointly,” you do not pay the Additional Medicare Tax until you earn $250,000.01. All wages earned AFTER that amount receive the additional 0.9 percent tax. All wages earned BEFORE that amount only have the standard 1.45 percent Medicare Tax.
What Constitutes Earned Income?
Income received from an employer in the form of wages typically constitutes earned income. This includes:
- Paid time off (vacation time, sick leave, etc.)
- Bonus pay
- Fringe benefits
The above list does not constitute everything the IRS considers “wages.” Please see Section 5 of Publication 15 for more information.
Are There Other Taxes that Help Pay for Medicare?
Your check stub or W-2 may include a line item called Social Security Taxes. This is another payroll tax that you share with your employer. The total tax paid to Social Security is 12.4 percent of your wages, with you and your employer each paying 6.2 percent. So, for every $100 in earnings, you pay $6.20 to Social Security.
If you’re self-employed, however, you bear sole responsibility for the full amount owed to Social Security.
Sometimes, you see a single line item for FICA (Federal Insurance Contributions Act). In this case, the total includes what you pay for both Social Security Tax and the Medicare Tax.
Not all wages get the Social Security Tax. Specifically, any wages over a certain amount are not subject to this tax. This is known as the wage base limit and the amount may change every year. In 2019, the wage base limit is $132,900. That means the most you’ll pay for Social Security Taxes in 2019 is $8,239.80, no matter how high your wages are.
Please note that neither the Medicare Tax nor the Additional Medicare Tax have wage base limits.
What Does FICA Pay For?
A common complaint about taxes is: What do they pay for? Well, wonder no more! At least as far as FICA is concerned…
As you now know, FICA includes 6.2 percent for Social Security and 1.45 percent for Medicare, with an equal amount paid by employers. These monies accounted for:
- 86 percent of Social Security’s revenues in 2015
- 38 percent of Medicare revenues in 2014
- 87 percent of the Hospital Insurance Trust (which covers Medicare Part A) in 2014
So, while few people smile when they see how much money they’ve handed over to Uncle Sam every pay period, it helps to know where that money is going.
Why Does FICA Exist?
You can thank the Great Depression and Roosevelt’s New Deal for FICA.
FDR signed the Social Security Act into law in 1935. During the Depression, it became clear that many Americans had no savings for their retirement years, nor a safety net for hard times.
Originally, Social Security included retirement benefits as well as unemployment compensation, health, and welfare programs as well as. In addition, the program only paid those retirement benefits to the “primary worker.” That meant the worker’s spouse or dependents received no assistance. In 1939, though, that changed when Congress added survivor benefits for spouses and children.
Disability benefits did not become part of Social Security until 1956, around the same time people first began enrolling in Medicare.
It’s also worth noting that, contrary to popular belief, members of Congress DO pay into Social Security. They have since 1984. Some federal employees chose to be grandfathered into the Civil Service Retirement System (CSRS). However, Social Security is the only option for everyone hired after January 1, 1984.
Additional Medicare Funding
Finally, your out-of-pocket payments help cover Medicare costs. This includes monthly premiums, deductibles, co-insurance, and co-payments.
If you need help understanding your Medicare options and finding the best plan to fit your budget, the licensed agents at Medicare Solutions can help. Just call us toll-free at 855-350-8101. You can also look for plans in your area online.