Any information provided is limited to those plans offered in your area. Please contact Medicare.gov or MEDICARE to get information on all of your options. For example, let’s say you are a single taxpayer who makes $150,000 in wages during the year and experienced a one-time capital gain of $90,000 from selling long-term stocks.

1. We/Our Partners do not offer every plan available in your area.
2. The ACA increased the Medicare tax to 3.8% for taxpayers whose incomes are over a certain threshold based on their filing status.
3. Knowing how tax dollars are allocated to fund parts of the Medicare program can help you understand your Medicare tax liability.

The Additional Medicare Tax

The Medicare tax, which is a type of payroll tax, funds medical, hospital and hospice care for these groups. The additional Medicare tax rate is 0.9% but only applies to the income above the taxpayer’s threshold limit. For an individual earning $225,000 a year, the first $200,000 is subject to a Medicare tax of 1.45%, and the remaining $25,000 is subject to an additional Medicare tax of 0.9%. The surtax is withheld from an employee’s paycheck or paid with self-employment taxes, with no employer-paid portion.

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This tax is paid by both you and your employer, who contributes a matching 1.45%. The Additional Medicare Tax (AMT) was added by the Affordable Care Act (ACA) in November 2013. The ACA increased the Medicare tax to 3.8% for taxpayers whose incomes are over a certain threshold based on their filing status. Some high-income taxpayers must pay an extra Medicare tax over and above the 2.9% rate.

Similar to Medicare tax, you are only responsible for half of this rate, or 6.2% while your employer is responsible for the other half. Anyone self-employed will need to pay the full 12.4% Social Security tax rate for their earned income. Under the Self-Employed Contributions Act (SECA), the self-employed are also required to pay Social Security and Medicare taxes. In 2023 and 2024, the Medicare tax on a self-employed individual’s income is 2.9%, while the Social Security tax rate is 12.4%.

W-2 employees pay 1.45%, and their employer covers the remaining 1.45%. Self-employed individuals, as they are considered both an employee and an employer, must pay the entire 2.9%. Nearly everyone who works in the U.S. is required to pay Medicare taxes.

Additional Medicare tax withholding rate

Whether you have to pay the Additional Medicare Tax depends on your annual income and your tax filing status. You only owe the additional 0.9% Medicare tax on the money you earn over and above $200,000. The Act provided a surcharge of 10% on federal corporate income taxes and personal income taxes as a measure to reduce the U.S. budget deficits and support the funding activity for the Vietnam War. Charging higher taxes would reduce the amount of money available for spending abroad to maintain the worldwide competitive position of U.S. goods. Social Security taxes stop once your annual income has reached $168,600. However, as an employed individual, you are only responsible for half or 1.45% and your employer is responsible for covering the other half of the Medicare tax rate.

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Medicare wages are employee earnings that are subject to a U.S. payroll tax known as the Medicare tax. Medicare Part A helps pay for inpatient hospital stays, skilled nursing facilities, hospice care, and home health care services. Unlike Medicare Part B (medical insurance) and Part D (prescription drug coverage), which are partially funded through premiums and general revenue, payroll taxes primarily finance Medicare Part A. The Medicare tax rate for 2024 is 2.9% and is split between employees and their employer, with each paying 1.45%.

The current Social Security tax rate is what is run rate arr definition formula and examples 6.2%, and this amount, just like the Medicare tax, must be matched by your employer. Tax-exempt interest income, such as from an investment in municipal bonds, is exempt from the NIIT, as are withdrawals from certain retirement plans and certain life insurance proceeds. But required minimum distributions taken from traditional IRAs, 401(k) plans, or 403(b) plans are included in your modified adjusted gross income (MAGI), and this can be an important distinction. NIIT is another surtax on high earners to raise revenue.

The U.S. government imposes a flat rate Medicare tax of 2.9% on all wages received by employees, as well as on business or farming income earned by self-employed individuals. “Flat rate” in this case means that everyone pays that same 2.9% regardless of how much they earn. But there are two other Medicare taxes that may apply to you depending on the sources and amount of your income. Medicare taxes and Social Security taxes held in trust funds by the U.S. Net Investment Income Tax (NIIT), also known as unearned income Medicare contribution surtax, is an additional 3.8% tax applied to net investment income. The tax is applied to the lesser of an individual’s net investment income or the amount by which the modified adjusted gross income (MAGI) exceeds a certain threshold.

Similar to the additional Medicare tax, there is no employer-paid portion of NIIT. While the standard Medicare tax rate applies to most individuals, high-income earners may be subject to Medicare surtaxes, including the Additional Medicare Tax and Net Investment Income Tax. Net investment income may include taxable interest, dividends, nonqualified annuities, capital gains, and rental income.

There is also a 0.9% Additional Medicare Tax that only the employee filing an individual tax return pays for wages that exceed $200,000. The additional tax also applies to those whose wages exceed $250,000 if they are married and file a joint return and exceed $125,000 for married taxpayers filing a separate return. A surtax is an additional tax imposed by the government on something already taxed.

But if you’re self-employed, you’ll pay the full 2.9%. A 403(b) retirement plan is comparable to a 401(k) plan but is designed specifically for employees of public schools, tax-exempt organizations, and certain ministers. A 457 plan is a retirement plan offered to state and local government employees. A 401(k) is a qualified employer-sponsored retirement plan into which eligible employees can make salary deferral contributions. The employee’s share of the Medicare tax is a percentage withheld from what is considered an adjustment to income their paycheck.

If you work in the United States, even if you do not plan on utilizing Medicare, you must still pay Medicare taxes. As with a 401(k), retirement savers can enjoy the benefit of tax-deferred savings in a traditional IRA. The most common investments offered in 401(k) plans are mutual funds. A 403(b) lets employees invest in a tax-sheltered annuity plan or a designated Roth account. Many taxpayers only have to deal with that first 2.9% flat rate Medicare tax, but you could end up paying more than this percentage to Medicare if you’re a high earner with investment income. Employers might not always be aware that an employee is subject to withholding for the AMT.