The W2 FormForm mentions in the Box No. 5 portion the "Medicare Wages and Tips." It is the total amount of an employee's earnings (wages and tips) subjected to the Medicare component of Social Security Taxes. In most cases, the amount in this box will be identical to the Box No. 1 portion of the W2 FormForm, which is the "Wages, Tips, Other compensation" section. Medicare Taxes are set based on an employee's total earnings.
What is the W-2 Form?
All employers must hand out Form W-2 to every employee and the IRS or Internal Revenue Service. It must be done at the end of the year. The W-2 carefully mentions and outlines an employee's total earnings yearly and the total sum of taxes that were deducted from their salaries. W-2 employees are those whose employers withhold taxes from their wages and report this data to the government.
Which Wages are Subjected to Medicare Tax?
The Medicare tax applies to almost all wages made by an employee in the United States. Every employee needs to pay medicare tax regardless of how much they earn. Employers must withhold Medicare and Social Security taxes from employees' paychecks under the Federal Insurance Contributions Act (FICA). The amount of tax levied on workers is determined by their annual earnings. The Medicare tax has no wage base limit or ceiling because it is based on the employee's total annual earnings.
Similarly, the Self-Employed Contributions Act (SECA) requires self-employed individuals to pay Medicare and Social Security taxes as part of their self-employment tax.
How Much is the Medicare Tax Rate?
The Medicare Tax for both employers and employees is 1.45%.
The baseline of the Medicare Tax rate is as follows:
Single Taxpayers: 1.45% off the first $200,000
For Married Taxpayers: 1.45% off the first $250,000 (Filing together)
For Married Taxpayers: 1.45% off the first $125,00 (Filing separately)
For instance, if an individual earns $2,000 throughout a pay period, $29 will be deducted from their salary, and their employer will match that amount by contributing an extra $29 to Medicare.
Imagine a worker who brings in more than $ 200,000 annually or a married couple that files jointly and makes more than $ 250,000 altogether. If this is the case, they must pay an extra Medicare Tax of 0.9%, bringing their total tax liability to 2.35% (1.45% + 0.9% additional tax). The Additional Medicare Tax applies to any earnings and tips of any kind.
If you work for yourself, your Medicare tax rate will be 2.9 percent to pay both the employee and employer amounts.
Who is Exempt from Medicare Taxes?
Anyone employed in the US is obligated to pay Medicare Taxes. According to the IRS, NRA or Non-Resident Aliens holding H-2, H-2A, J, and Q visas do not have to pay Medicare Taxes as long as they are eligible according to the IRS's outlines.
How does the Government Utilize Medicare Tax?
The government uses Medicare Taxes to fund its medicare programs. Medicare programs over health insurance for:
Individuals that are 65 years or older.
Individuals that are below 65 years but are disabled.
Individuals suffering from End-Stage Renal Disease
Medicare is segmented into many plans to cover all medical conditions.
Medicare Part A (Hospital Insurance) - Part A contributes to the expense of inpatient care provided by hospitals, particularly those with restricted access and nursing homes. Furthermore, home health and hospice care are also covered to some extent.
Medicare Part B (Medical Insurance) - Part B of Medicare is used to finance doctor visits and other outpatient care. Coverage for home health care and services supplied by occupational and physical therapists are also included, as are a few additional treatments not covered by Part A. Medicare's Part B helps pay for necessary care when it determines that a certain service or product is medically necessary.
Medicare Part D (Prescription Drug Coverage) - Prescription drug is also covered by this and is available for anyone with a Medicare plan.
The Affordable Care Act is also part of the Medicare Tax and is better known as Obamacare. It is partly funded using money raised through the Additional Medicare tax.