When Medicare was enacted as a federal law in 1965, the funds to support the program became a payroll tax on earned income. The payroll taxes required for the Federal Insurance Compensation Act (FICA) are to support both your Social Security and Medicare benefits programs. Your employer makes a matching contribution to the Medicare program.
Currently, the FICA tax is 7.65 percent of your gross taxable income for both the employee and the employer. The Social Security rate is 6.2 percent, up to an income limit of $137,000 and the Medicare rate is 1.45 percent, regardless of the amount of income earned. Your employer pays a matching FICA tax. This means that the total FICA paid on your earnings is 12.4 percent for Social Security, up to the earnings limit of $137,000 and 2.90 percent regardless of the total amount you have earned. The benefit of placing funds into this program during your working career is the healthcare coverage you will receive at the time you become eligible for Medicare benefits.
Who Pays for Medicare?
Every person who receives a paycheck is paying a Medicare tax. If you are retired and still working part-time, the Medicare payroll tax will still be deducted from your gross pay. Unlike the Social Security tax which currently stops being a deduction after a person earns $137,000, there is no income limit for the Medicare payroll tax. If you are self-employed, you are required to pay both the employee and employer tax for Medicare.
When are Medicare taxes paid?
The Medicare tax is an automatic payroll deduction that your employer collects from every paycheck you receive. The tax is applied to regular earnings, tips, and bonuses. The tax is collected from all employees regardless of their age. If you are currently working and receiving Social Security benefits, you will still have the Medicare payroll tax taken from your paycheck.
Your employer automatically deducts your Medicare liability from your taxable income. The Internal Revenue Service determines the percentage of your income that will be taxed for Medicare. The current tax rate for Medicare, which is subject to change, is 1.45 percent of your gross taxable income. Your employer also pays a matching Medicare tax based on your paycheck.
There are two ways that you may see the Medicare payroll deduction applied to your paycheck.
• If your paycheck is directly deposited into your checking account you will be given a pay statement with all the itemized deductions.
• If you receive a paycheck, there will a pay stub attached or included with the check that itemizes all of your deductions.
The basic deductions applied to your gross taxable income are:
• Standard Federal Income Tax is based on your gross earnings and number of exemptions.
• State Tax varies from one location to another and is based on the rate applied in your state.
• FICA Social Security Tax of 6.2 percent is withheld up to a limit of $137,000.
• FICA Medicare Tax of 1.45 percent is withheld on all
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