If you’re like most people, then you look at your paycheck every couple of weeks and wonder where all the money went. Even small business owners and the self-employed have to think about the different categories of taxes they’ll owe to the IRS at the end of the year. For those who get a regular paycheck, you may notice that various forms of withholding are collected. You’ll have federal income tax and state income tax, assuming you live in a place that charges such a tax. You’ll also have a handful of smaller, incidental federal taxes. One of those taxes goes toward Medicare. What is this, why do you have to pay it and how much will it cost?
The baseline Medicare tax
There are two different ways in which taxes are collected to fund Medicare. The first is through what the IRS calls the Medicare Hospital Insurance Tax. In 2018, this tax is a flat rate of 2.9% of all income that you earn. However, your employer will pay half of this. This means that if you’re earning $100,000 per year, you’ll owe $2,900 in taxes each year to fund Medicare, with only $1,450 coming out of your pocket This money will be broken down on a monthly basis, taken out of every paycheck along the way. Medicare is a system that provides health insurance for older Americans. As such, people are expected to pay into it as they go through their working years before finally drawing back their benefit when they reach the age of 65.
People who are self-employed will have to pay roughly double to satisfy the Medicare Hospital Insurance Tax. This is lumped together with Social Security taxes in order to form what is known as the “self-employment tax.” This happens because self-employed people are paying both the employer and employee portion of the tax. In many cases, the tax situation for self-employed people is both more expensive and more complicated because they have to satisfy both of these duties when April rolls around.
Special Medicare taxes for high earners
Over the last few years, the government has figured out that Medicare is very expensive. Baby Boomers are getting older, and their care represents a significant expense for the system. In order to keep the system solvent, legislators devised an additional Medicare tax only for those people who fall into high-earning categories.
The Affordable Care Act put in this tax, which is known as the “Additional Medicare Tax.” If you happen to earn more than $200,000 per year, your income over that threshold will be subject to an extra tax of .9% per year. Your employer may cover half of this, as well, meaning that you will effectively pay 1.9% in Medicare taxes on all income over $200,000, while paying only the standard 1.45% on all money less than $200,000. The idea behind this addition to the tax code is that people who earn a lot can afford a small bump to supplement an important American safety net.