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How the Medicare Tax Rate is Changing


The IRS will determine the Medicare tax rate for 2021. The amount is subject to change at any time. Medicare taxes apply only to your earned income, not your property or inheritance income. Medicare taxes are payroll tax. Meaning, an employer and an employee both contribute. But, if you’re self-employed, you’ll be responsible for the full amount.

What is the Medicare Tax Rate for 2021

The Medicare tax rate is 1.45%. But the Federal Insurance Contributions Act tax combines two rates. FICA taxes include both the Social Security Administration tax rate of 6.2% and the Medicare tax rate. Thus, the total FICA tax rate is 7.65%. The maximum Social Security tax amount for both employees and employers is $8,239.80. For self-employed people, 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 this additional fee. The charge is withheld from the employee’s wages only. The self-employment tax rate is slightly higher, at 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 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. Further, the Social Security Surplus helps fund the deficit. The National Committee to preserve Social Security and Medicare works to keep federal benefits available.

Helpful Hint: Medicare premiums are tax-deductible!

What is the Social Security Tax Limit

There’s no need to pay Social Security taxes on the income you earn over $137,700. The limit is 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. 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%.

Breaking Down the Additional Medicare Tax

The Affordable Care Act enforces high wage earners to pay an extra Medicare payroll tax, or Medicare surtax, of 0.9% on earned income. All U.S. employees have to pay the Medicare tax.No matter the citizenship or residency status, each individual must pay this tax. Single filers with an income of at least $200,000 will need to pay the additional Medicare tax.

Married individuals who file separately will pay an extra tax if income is $125,000 or more. But if married and filing jointly, you’ll be subject to a fee when combined income is $250,000 or more. The additional Medicare tax rate is a surtax that totals 2.35%.

This cost will be added to your Social Security and 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 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 the 2.9% flat tax rate. But if you earn a higher income from investments, you could end up paying even more than this percentage.

FAQs

Do I need to pay Medicare taxes if I am on Medicare?
As long as you’re working, you’ll need to pay Medicare taxes on your earnings. Even if you’re on Medicare while working. No matter what age you are, you’ll need to pay FICA taxes on your earned income.
How are Social Security and Medicare tax calculated?
You can calculate your Social Security and Medicare tax by taking your gross income and multiplying it by 7.65%. This is the amount of your company’s Social Security and Medicare tax matching contribution.
Is there a cap on Medicare tax?
Currently, no wage limit for Medicare tax exists; 1.45% is applied to all covered wages.
When can I stop paying Medicare tax?
For as long as you have earned income, you’ll continue to contribute to Social Security and Medicare with FICA taxes. But, if you have no earned income, you won’t pay Social Security or Medicare taxes.

Lindsay Engle

Lindsay Engle is the Medicare expert for MedicareFAQ. She has been working in the Medicare industry since 2017. She is featured in many publications as well as writes regularly for other expert columns regarding Medicare. You can also find her over on our Medicare Channel on YouTube as well as contributing to our Medicare Community on Facebook.

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