How the Medicare Tax Rate is Changing
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The Medicare tax rate for 2021 is something that the IRS will determine. The amount is subject to change at any point. Medicare taxes only apply to the income you earn, not your property or inheritance income.
Medicare taxes are a payroll tax. Meaning, an employer and an employee both contribute to the tax. But, if you’re self-employed, you’ll be responsible for the full amount.
Why may you ask? Well, in this situation, you’re both the employer and the employee. Medicare taxes don’t have wage limits, so all wages are subject to the charge.
We understand that understanding these rates can be confusing. Below, we’ll go ahead and break down tax rates.
What is the Medicare Tax Rate in 2021
The Medicare Tax rate is 1.45%. But the Federal Insurance Contributions Act tax rate combines two rates. FICA tax rates include both the Social Security Administration tax rate of 6.2% and the Medicare Tax rate. The total? The FICA tax rate is 7.65%.
The maximum Social Security tax amount for both employees and employers is $8,239.80. For people who rely on self-employment, the maximum Social Security tax is $16,479.60. Anyone who earns wages over $200,000 will need to pay an extra 0.9% Medicare tax.
Employers aren’t responsible for paying this additional fee. The charge will need to be withheld from the employee’s wages only. The self-employment tax rate will be slightly higher at a rate of 15.3%. Both the Social Security tax rate of 12.4% and the 2.9% Medicare tax rate contribute to this figure.
What is the Federal Income Tax Brackets
The IRS updates it’s tax brackets on an annual basis. Below, we’ll give you a breakdown of taxes due in April 2021. The income tax brackets below are for federal income taxes, and not Medicare tax rates.
The rates show the current rates and will relate to the return you’ll file in 2021. We know that these figures can look pretty confusing. Let’s discuss how your income tax gets broken down.
For single filers who make $85,000 a year, you won’t pay 24% on the entire $85,000.
Thankfully it will look a little more like this:
- $9,875 of your income has a 10% tax
- $30,249 has a 12% tax
- $45,399 has a 22% tax
- $77,774 has a 24% tax
Please note, these figures will vary depending on your filing status. The above rates only apply to federal IRS income tax brackets. You can contact your state to find out how your income will be locally taxed.
Tax deductions can reduce the income you’re liable to receive. Tax credits can reduce the amount of taxes you owe, but won’t change the tax bracket you’ll end up in.
Helpful Hint: Medicare premiums are tax-deductible!
What is the Social Security Tax Limit
There is no need to pay Social Security taxes on the income you earn over $137,700. The limit is known as the Social Security wage base. So, no matter how much money you make, you’ll never pay more than $8,537.40 in Social Security taxes. But this wage base can increase every year.
The wage base is an increase of $4,800. You’ll need to pay the Medicare tax on all income you earn throughout the year. If your income is above $200,000 ($250,000 for married couples filing together), your Medicare tax rate will rise to 2.35%.
What is the Social Security Tax Rate
The Social Security Tax rate is a percentage of your payroll that goes towards funding the program. In 2021, this rate is 6.20%.
Anyone self-employed will need to pay double. Although, with proper deductions, you may pay half of that. You’ll pay into the program while you work, and when you retire, the program compensates you.
Breaking Down the Additional Medicare Tax Rate
The Affordable Care Act enforces high wage earners to pay an extra Medicare payroll tax of 0.9% on earned income. All U.S. employees have to pay the Medicare tax.
Everyone is included in this. Despite the citizenship or residency status of the employer or the employee. Single filers with an income of more than $200,000 will need to pay to an additional Medicare Tax.
Married individuals who file separately will pay an extra tax if income is more than $125,000. But if married and filing jointly, you’re subject to a fee when combined income is more than $250,000. The additional Medicare tax rate is a Medicare surtax that totals 2.35%.
The cost will add to your Social Security tax rate and your state income taxes.
How Does the Medicare Tax Work
The percentage of income that goes to your Medicare tax is 1.45%. Your employer will then match the rate you’ll pay. But if you’re self-employed, you’ll pay the full 2.9%.
Since 2013, you’ll pay a 3.8% Medicare tax rate on your net investment income when the total amount exceeds the income thresholds. The tax, known as the Net Investment Income Tax, will go into the government’s General Fund and not into Medicare.
Most people only pay that 2.9% flat tax rate. But if you earn a higher income with investment income, you could end up paying even more than this percentage.