What is Medicare tax?

Medicare tax is a federal payroll tax that funds the Medicare health insurance program. Employees pay 1.45% of all wages, with no income cap. Employers match that 1.45%, bringing the total to 2.9%. Self-employed individuals pay the full 2.9% through self-employment tax. High earners face an additional 0.9% Medicare surtax on wages exceeding $200,000 for single filers.

The additional Medicare tax trap

The 0.9% surtax kicks in at $200,000 for single filers and $250,000 for married filing jointly. Employers are not required to withhold it until wages exceed $200,000, regardless of filing status. If you and your spouse both earn $180,000, neither employer withholds the surtax, but you owe it on combined income exceeding the threshold. Plan accordingly.

Self-employed Medicare calculations

Self-employment tax includes both Social Security and Medicare portions. Your Medicare piece is 2.9% of net self-employment income. The additional 0.9% applies if net self-employment income plus any wages exceed the threshold. You can deduct half of the self-employment tax on your return, but the additional Medicare tax is not deductible.