Why Do We Pay Medicare Taxes on Wages and Again When We Colllect Social Security
If you've ever looked at your earnings statement from a task, you have likely noticed some tax withholding. As function of your overall payroll taxes, the federal government requires employers to collect the FICA (Federal Insurance Contributions Human activity) taxation. The FICA tax includes 2 separate taxes. Social Security taxes fund Social Security benefits and the Medicare tax goes to pay for the Medicare Infirmary Insurance (HI) that yous'll get when you're a senior. Below we'll take a closer look at what Medicare taxes are and how they benefit y'all. And if you'd like the assistance of an expert one-on-i, head over to SmartAsset's fiscal advisor matching tool to become paired up with a financial professional person who can provide guidance tailored to your particular needs.
Medicare Taxes: The Basics
Like Social Security benefits, Medicare's Hospital Insurance plan is funded largely by employment taxes. If you work "nether the tabular array" you lot won't pay into these systems. That's why payroll taxation withholding, although it takes a chunk out of your take-habitation pay, is actually providing you with something in return for those lost dollars in your paychecks.
Medicare Howdy taxes began in 1966, at a modest rate of 0.seven%. Employers and employees were each responsible for paying 0.35%. Employees paid their share when their employers deducted it from their paychecks. Since 1966 the Medicare Howdy revenue enhancement rate has risen, though it'due south still below the Social Security tax rate. The electric current Social Security tax is 12.iv% with employees and employers each paying 6.ii%.
Today, the Medicare tax rate is 2.9%. Employers and employees split that cost with each paying 1.45%. Unlike with Social Security taxes, at that place is no limit on the income subject to Medicare taxes.
Medicare Taxes and the Affordable Care Act
The Affordable Intendance Act (ACA) added an actress Medicare tax for high earners. This surtax is known equally the Additional Medicare Revenue enhancement. Every bit of January 2013, anyone with earned income of more than than $200,000 ($250,000 for married couples filing jointly) has to pay an additional 0.9% in Medicare taxes across the standard one.45%. That unabridged 0.9% is the responsibility of the employee. It is not split betwixt the employer and the employee.
If your income means y'all're subject to the Additional Medicare Tax, your Medicare tax rate is two.35%. However, this Medicare surtax only applies to your income in backlog of $200,000. If you brand $250,000 a year, yous'll pay a 1.45% Medicare tax on the offset $200,000, and 2.35% on the remaining $50,000.
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 iii.eight% 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 field of study to the NIIT. Examples of investment income that is subject to the NIIT include dividends, interest, passive income, annuities, royalties and capital gains.
The iii.viii% revenue enhancement applies to the lesser of either your internet investment income or the amount by which your MAGI exceeds $200,000 (or $250,000 for joint filers). That means the NIIT acts as either an extra income revenue enhancement or an extra capital gains tax. You tin can written report your cyberspace investment income on IRS Grade 8690.
According to the IRS, a taxpayer may be bailiwick to both the Additional Medicare Tax and the NIIT, but not necessarily on the same types of income. That's because the 0.9 percent Additional Medicare Tax applies to wages, compensation and self-employment income over the $200,000 limit, merely it does not use to net investment income.
Lesser Line
The combination of Social Security and Medicare tax rates, plus the income tax withheld from your paycheck, puts a serious dent in your take-abode pay. Currently, the employee share of Social Security and Medicare taxes is 7.65%. If you make over $200,000, remember to account for the Additional Medicare Tax. It may seem similar a lot of trouble now, but all this tax withholding is designed to requite you a safety net when y'all reach retirement.
Healthcare Tips
- If yous need assistance with medicare taxes or any other financial issue, consider working with a financial advisor, who volition walk yous through everything yous need to know. Finding a financial advisor doesn't have to be hard. SmartAsset's gratuitous tool matches you with up to three financial advisors in your surface area, and you tin can interview your advisor matches at no cost to determine which i is right for yous. If you're prepare to detect an advisor who can help you achieve your financial goals, go started now.
- Life insurance is important to have, especially if you are married or take children. Information technology isn't ever easy to know exactly how much life insurance you lot should buy, so use SmartAsset's free life insurance computer to see what you need for your situation.
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Source: https://smartasset.com/taxes/what-are-medicare-taxes
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