What are Medicare Taxes?

Medicare tax is something that most people know about, but few are familiar with what it does. It's one of those charges on your W-2 alongside Social Security Tax. You may see it when working with an NYC tax preparation professional. But what is it, and why do you pay for it?

Funding Medicare Part A

The sole purpose of Medicare tax is to fund the Medicare system. More specifically, it pays for Medicare Part A.

Medicare is a federal health insurance program for people over the age of 65. It also covers those with disabilities and certain medical conditions. Part A refers to hospital insurance. It covers hospital stays, hospice care, nursing home stays and more.

Medicare tax and Social Security tax go into trust funds held by the United States Treasury. Medicare Tax goes into the Hospital Insurance Trust Fund, which funds Medicare Part A.

This tax helps current and future Medicare beneficiaries. The idea is that you pay the tax throughout your life to utilize it yourself when you reach 65.

How Do You Pay Medicare Tax?

For most people, Medicare tax comes out of their paycheck directly. The current tax rate is 2.9 percent. Employers and employees split that percentage evenly.

Under the Federal Insurance Contributions Act (FICA), your employer must withhold both Medicare and Social Security taxes from your paycheck. You don't pay for it at the end of the year like some taxes. It comes out of each paycheck, making it easier for most people to manage.

If you're self-employed, things are different. Because you have no employer, you must pay the full 2.9 percent and employer contributions for Social Security tax. In those cases, the taxes are part of self-employment taxes.

It's a good idea to visit an NYC tax preparation professional if you are self-employed. It doesn't matter if you pay quarterly taxes or wait until tax season to pay everything in one lump sum. Tax preparers will help you calculate your Medicare tax responsibilities and help you find ways to reduce your taxable income.

Read a similar article about Brooklyn tax planning here at this page.