Together with also paying both halves of the Social Security tax, this obligation is known as the self-employment tax and amounts to 15.3% of your income. If you’re self-employed, you’ll be responsible for paying both the employer and employee contribution, totaling 2.9%. The good news is that you can likely deduct half of your total self-employment tax when you file your return. As with a 401(k), retirement savers can enjoy the benefit of tax-deferred savings in a traditional IRA. Medicare and Social Security taxes are levied on both employees and employers under the Federal Insurance Contributions Act (FICA). In general all workers, whether citizens or aliens, must pay Social Security and Medicare taxes (FICA).
The tax funds are used for Medicare Part A, which covers hospital insurance for senior citizens and those with disabilities. Part A costs include hospital, hospice, and nursing facility care. Nearly everyone who works in the U.S. is required to pay Medicare taxes.
The History of the Medicare Program
Under the Federal Insurance Contributions Act (FICA), employers withhold Medicare and Social Security taxes from employees’ paychecks. The Self-Employed Contributions Act (SECA) mandates that self-employed workers pay Medicare and Social Security tax as part of their self-employment tax. 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. This amount is split evenly between an employer and employee, each paying 1.45%.
- That’s because the 0.9 percent Additional Medicare Tax applies to wages, compensation and self-employment income over the $200,000 limit, but it does not apply to net investment income.
- Another result of ACA reforms is the Net Investment Income Tax (NIIT).
- The 3.8% rate applies to the lesser of your net investment income or the amount by which your MAGI exceeds a threshold amount.
- Currently, the employee share of Social Security and Medicare taxes is 7.65%.
- Working with an adviser may come with potential downsides such as payment of fees (which will reduce returns).
- As with a 401(k), retirement savers can enjoy the benefit of tax-deferred savings in a traditional IRA.
If you are subject to the AMT, you must complete and file Form 8959 with your tax return. Also, you can make estimated tax payments that include the AMT amount you think you’ll owe. Employers might not always be aware that an employee is subject to withholding for the AMT. For example, if an employee works more than one job, their incomes from Employer A and Employer B might both fall under the threshold individually, so neither employer would withhold this tax. The Additional Medicare Tax (AMT) was added by the Affordable Care Act (ACA) in November 2013.
Net Investment Income Tax
Employers can be subject to penalties and interest for not withholding the AMT, even if the oversight was due to understandable circumstances. In addition to noting particular withdrawals for Medicare and Social Security from each paycheck, an employee should consider options for saving for retirement. In many cases, you can elect to have a portion deducted from your paycheck for this purpose. The 3.8% rate applies to the lesser of your net investment income or the amount by which your MAGI exceeds a threshold amount. For 2023, the threshold amounts are the same as for the AMT (see the table above).
If you make $250,000 a year, you’ll pay a 1.45% Medicare tax on the first $200,000, and 2.35% on the remaining $50,000. Medicare is a federal insurance program that covers certain health care costs for people over age 65 and disabled people. Upon qualifying for Medicare, you may either enroll in the original Medicare coverage, or a private plan known as Medicare Advantage.
Additional Medicare Tax
The Affordable Care Act (ACA) added an extra Medicare tax for high earners. As of January 2013, anyone with earned income of more than $200,000 ($250,000 for married couples filing jointly) has to pay an additional 0.9% in Medicare taxes beyond the standard 1.45%. The payroll tax for Medicare is 1.45% on the first $200,000 of an employee’s wages.
What Is Medicare Tax?
In other words, 1.45% comes out of your pay and your employer then matches that, paying an additional 1.45% on your behalf, for a total of 2.9%. If your income means you’re subject to the Additional Medicare Tax, your Medicare tax rate is 2.35%. However, this Medicare surtax only applies to your income in excess of $200,000.
Another result of ACA reforms is the Net Investment Income Tax (NIIT). The NIIT, also known as the Unearned Income Medicare Contribution Surtax, is a 3.8% Medicare tax that applies to investment income and to regular income over a certain threshold. If your Modified Adjusted Gross Income exceeds $200,000 ($250,000, if you’re married and filing jointly) you may be subject to the NIIT. Examples of investment income that is subject to the NIIT include dividends, interest, passive income, annuities, royalties and capital gains. Employers and employees split that cost with each paying 1.45%.
Is FICA Based on Gross or Net Income?
The maximum Social Security tax that a self-employed person would pay is $19,864.80 in 2023 and $20,906.40 in 2024. For 2023 and 2024, the rate for the Social Security tax is 6.2% for the employee and 6.2% for the employer, or 12.4% total. The tax applies to the first $160,200 in 2023 and the first $168,600 in 2024. The Social Security tax rate is assessed on all types of income that an employee earns, including salaries, wages, and bonuses. “Partnering with an advisor to create a more customized portfolio that considers tax efficiency can help to reduce your exposure to that net investment income tax,” says Carcone. The most common investments offered in 401(k) plans are mutual funds.