Every U.S. citizen that earns wages must pay FICA (Federal Insurance Contributions Act) taxes. These taxes comprise:

  • 6.2 % Social Security
  • 1.45 % Medicare tax

These taxes are contributed by both the employee and the employer, so in fact a total of 15.3 % of an employee’s gross salary is taxed. If you are self-employed, you are responsible for payment of the entire amount. That is, 12.4 % for Social Security and 2.9 % for Medicare. The good news: You can usually deduct half of the FICA tax on your tax return at the end of the financial year.

What is the Medicare Tax Rate for 2020?

The Medicare tax rate for 2020 is 2.9 % of all covered wages. 1.45 % contributed by the employer and 1.45 % withheld. In other words, contributed by the employee. 

Is There a Cap on Medicare tax?

For 2020, Social Security is only taxed on annual wages up to the value of $137 700. This means that the maximum Social Security tax that employers and employees will pay is $8 537.40. However, there is no income cap for the Medicare component of your FICA tax.

What is Additional Medicare Tax?

If your annual income exceeds the threshold amount for your filing status, an additional Medicare tax is deducted from said income. The thresholds are as follows:

  • For two married individuals filing jointly, the threshold is $250 000.
  • For a married individual filing separately, $125 000.
  • The threshold for a single person is $200 000.
  • For the head of a household, with a qualifying person – $200 000.
  • For a widow(er) with dependent child/ren – $200 000.

How Do I Calculate Additional Medicare Tax?

The additional Medicare tax deduction is over and above the Medicare tax that is withheld from your income by your employer. For the first $200 000 of your income, a Medicare tax of 2.9 % is leveraged. For every dollar exceeding that amount, a further 0.9 % is leveraged. For example, if you earn $250 000 per year, your Medicare tax contribution will be:

  • $200 000 x 2.9 % =  $5 800 in Medicare tax (half is withheld, and half contributed by your employer
  • $50 000 x 0.9 % = $450 in additional Medicare tax (also withheld)
  • Totaling $6250

Note: employers do not contribute to this surtax. The 0.9 % of the value over $200 000 is solely withheld from the wages by the employer. If you are self-employed, you should pay this additional Medicare tax as part of your quarterly estimated tax payments.

When Did Additional Medicare Tax Start?

The Affordable Care Act was passed in 2010. However, the final regulations for the additional Medicare tax were only issued by the Internal Revenue Service (IRS) at the end of 2013. The surtax applies to wages, self-employment income, and compensation. These regulations require that employers are responsible for withholding the tax on employee wages.

Why Do I Need to Pay Additional Medicare Tax?

To cover the costs of the country’s Medicare program, your employer is obliged to withhold a Medicare tax from your paycheck. By law, employers are required to collect both Social Security and Medicare tax. This money is then submitted to the IRS (Internal Revenue Service) every quarter. 

If you, or you and your spouse, earn wages over a certain threshold, you will be liable for additional Medicare tax. This additional Medicare tax is designed to lean on wealthier U.S. citizens to pay for the medical care and health welfare of lower-income Americans.

What is Withholding Additional Medicare Tax?

If an employer pays wages above $200 000 to an employee in a calendar year, that employer must withhold additional Medicare tax from those wages. The value of the additional Medicare tax is based purely on the wages earned by the individual from that employer. If you earn additional income from self-employment, for example, you should make estimated tax payments to make up the shortfall. Alternatively, you can request additional income tax withholding from your employer. Make use of Form W-4, Employee’s Withholding Certificate to do so.

How Do I Report Additional Medicare Tax When I File My Tax Return?

To report additional Medicare tax when you file your tax return, complete Form 8959, and submit it with your tax return. You must file Form 8959 if you are liable for additional Medicare tax and/or your employer withheld additional Medicare tax from your earnings.

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