While the Medicare tax is actually 2.9 percent of all wages earned, most people think of the Medicare tax as just 1.45 percent, since that is what they see collected. Employers are required to withhold 1.45 percent of each paycheck. In addition to that withholding, employers are required to pay an additional 1.45 percent from their own pocket for a total tax of 2.9 percent.
The purpose of the Medicare tax is to provide funding for the U.S. Medicare health insurance program. Medicare is a form of health insurance for people age 65 and older (and also for people under age 65 with certain disabilities) and provides for all kinds of medical care, including hospital visits and treatment, as well as prescription medications. The Medicare tax is collected to pay for all of those health insurance benefits.
Unlike federal income taxes, employees are not responsible for calculating or paying the Medicare tax. Employers, though, are required to withhold 1.45 percent of each paycheck. While you are responsible for paying the tax, your employer is responsible for making sure the correct amount is withheld and paid. Unlike federal income taxes, you do not need to file a tax return for the Medicare tax. The Medicare tax rate is the same no matter how little or how much money you earn during the year.
Self-employed workers must calculate and pay the full 2.9 percent Medicare tax. Technically speaking, a self-employed person is both employer and employee, so the self-employed person must pay the employee's 1.45 percent and the employer's 1.45 percent. The good news, though, is that self-employed people can claim an income tax deduction for half of all Medicare taxes paid, so the cost of the tax is minimized at least a little. Self-employed people report their Medicare tax by filing IRS Schedule SE.
Compared to Social Security Tax
Medicare tax is similar to the Social Security tax (Fed OASDI/EE Tax). The Social Security tax is higher (12.4 percent in 2013) but is collected in the same way as the Medicare tax. Many people refer to the Social Security Tax and the Medicare tax collectively as the FICA tax, or the Social Security tax or payroll taxes.
Most people must pay the payroll taxes; the exceptions are very rare. First, college students working for the college they currently attend are exempt from payroll taxes. Second, certain religious people are exempt from payroll taxes if both the employer and employee belong to a religion that, for spiritual reasons, opposes insurance. Other than that, most people are stuck paying the Medicare and Social Security taxes.
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