If you run a business, you must withhold Federal Insurance Contributions Act (FICA) taxes from your employees’ wages. If you earn a paycheck, you’re going to see FICA listed on your pay stub. It’s the reality of payroll. But what are you really paying? FICA combines two types of taxes: Social Security (previously discussed in this blog) and Medicare.
What is Medicare?
Medicare is the federal health insurance program that aids Americans who are 65 or over, or anyone – regardless of age – who has permanent kidney failure or other debilitating disabilities.
What does it entail?
The federal government imposes a Medicare tax of 2.9% to help pay for this program. It’s imposed as a flat rate on all wages, salaries, business or farming income. Unlike the Social Security tax, there is no annual wage limit. An employer pays 1.45% of the tax while the employee pays the other 1.45%. If you’re self-employed, you will pay both halves, but can deduct half as an adjustment later on.
An additional tax can be levied if an individual’s Medicare wages exceed a threshold amount based on his or her filing status listed on a W-4. For example, a person filling single that exceeds the $200,000 limit will be taxed an additional 0.9%. Employers do not match. Form 8959 is used to determine the Additional Medicare Tax.
Further questions? Check out the IRS’s FAQs.