What is the Medicare deduction rate?


Quick Answer

As of 2015, employees and self-employed individuals in farming and business pay a rate of 2.9% of income as Medicare tax. However, individuals who are in a higher income band pay an additional Medicare tax ranging from 0.9% to 3.8%. The additional rates for higher income earners were implemented in 2013, according to William Perez for About.com.

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Full Answer

The payment of Medicare taxes is not subject to a particular limit, which is the same as Social Security taxes. Employees and self-employed business people and farmers pay the flat rate of 2.9%. The employee's payment of this flat rate is shared equally between the employee and the employer; both parties pay 1.45% each. However, self-employed individuals pay the full 2.9%, states Perez.

An additional 0.9% is chargeable on income that exceeds a particular threshold. The threshold for 2014 and 2015 is $250,000 for married couples filing jointly; $200,000 for single, head of household or qualified widow(er); and $125,000 for married couples filing separately. It is a requirement by law that employers withhold the additional 0.9% of income exceeding the threshold. However, employers may not be privy to the fact an employee's total income exceeds the threshold. Therefore, it is the responsibility of the employee to pay the additional 0.9% when the personal income tax return is being calculated, explains Perez.

The 3.8% Medicare tax is applied to "unearned income." This tax is more properly referred to as net investment income tax. Individuals make a contribution if the net investment income or adjusted gross income surpasses the threshold. The threshold is the same as the amounts for the 0.9% tax, notes Perez.

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