How does the Medicare tax work?

The Medicare tax is one of two taxes all employers are required to withhold under the Federal Insurance Contributions Act (FICA). The other is the Social Security Tax.

Under the Affordable Care Act (ACA), the Additional Medicare Tax was added. The Additional Medicare Tax applies to wages, railroad retirement (RRTA) compensation, and self-employment income over certain thresholds. Employers are responsible for withholding the tax on wages. There's no employer match for Additional Medicare Tax. Click here for more information on the Additional Medicare Tax.

Self-employed individuals generally must pay self-employment tax (SE tax) as well as income tax. SE tax is a Social Security and Medicare tax primarily for individuals who work for themselves. It is similar to the Social Security and Medicare taxes withheld from the pay of most wage earners. In general, anytime the wording "self-employment tax" is used, it only refers to Social Security and Medicare taxes and not any other tax (like income tax).

The Medicare tax is a percentage of gross wages that all employees, employers and self-employed workers must pay to fund the federal program. It is the employer’s obligation to withhold the correct amount of Medicare tax from every paycheck and forward it to the federal government on time. Failure to do so can result in significant penalties.

There is no wage base limit for the Medicare Tax; all covered wages are subject to Medicare Tax.

For more information on what wages are subject to Medicare Tax, Publication 15, (Circular E), Employer’s Tax Guide.

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