Glossary term
Medicare Tax
Medicare tax is a payroll tax that helps fund Medicare and applies to wages, tips, and self-employment income.
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What Is Medicare Tax?
Medicare tax is a payroll tax that helps fund Medicare. It applies to wages, tips, and self-employment income. Employees generally pay Medicare tax through payroll withholding, employers pay a matching amount, and self-employed people pay Medicare tax through self-employment tax.
Medicare tax is separate from income tax. It is also separate from Social Security tax, even though both are part of FICA for employees and SECA for self-employed workers.
Key Takeaways
- Medicare tax applies to earned income such as wages and self-employment income.
- Employees and employers generally each pay a Medicare tax amount.
- Self-employed workers pay both sides through self-employment tax.
- Higher earners may owe Additional Medicare Tax above statutory thresholds.
- Medicare tax does not have the same wage base cap as Social Security tax.
How Medicare Tax Is Paid
For employees, Medicare tax is withheld from paychecks and reported with other payroll taxes. Employers also pay their share. For self-employed workers, Medicare tax is included in self-employment tax and is generally handled through estimated taxes and the annual tax return.
Taxpayer | How Medicare tax is paid | What to watch |
|---|---|---|
Employee | Withheld from wages by the employer. | Paystub withholding and year-end Form W-2. |
Employer | Employer pays a matching payroll tax amount. | Payroll tax deposits and employment tax returns. |
Self-employed worker | Paid through self-employment tax. | Estimated taxes and Schedule SE. |
Higher earner | May owe Additional Medicare Tax. | Thresholds depend on filing status and income type. |
Additional Medicare Tax
Additional Medicare Tax applies to wages, compensation, and self-employment income above certain thresholds. Employers must withhold it from wages above the wage-withholding threshold, but an individual's final tax liability depends on filing status and total income.
This can create surprises for dual-income households, people with multiple jobs, or self-employed workers whose withholding does not fully cover the tax. Medicare tax planning is often about withholding and estimated payments rather than deductions.
Payroll and Estimated Tax Planning
Medicare tax is usually automatic for employees, but it can require more attention when someone has multiple jobs, combines wages with self-employment income, or crosses Additional Medicare Tax thresholds during the year. In those cases, withholding and estimated tax payments may need adjustment to avoid a balance due at filing.
The Bottom Line
Medicare tax is an earned-income payroll tax that funds Medicare. It affects employees, employers, and self-employed workers, and higher earners should pay attention to Additional Medicare Tax and withholding rules.