Medicare Tax

History of Medicare

Medicare Tax

Medicare began with the Social Security Act of 1965. The purpose of the act is to care for those persons over age 65, and certain others with special needs. Under the Social Security Act, Medicare was established to provide health insurance to the elderly. Today, there are four parts to Medicare benefits. Part A provides for hospital insurance, while part B provides medical insurance. Medicare part C is comprised of Medicare Advantage plans. Finally, Part D encompasses the various prescription drug plans offered by the federal government. Initially, there was a cap on the amount of income that was subject to the Medicare tax for each individual. With rising costs in the Medicare plan, however, this cap was removed in 1994. Currently, all of an individual’s earned income is subject to the flat rate Medicare tax.

Medicare Tax Payments

The medicare tax is equal to 2.9 percent of gross wages. For regular wage-earning employees, the Medicare tax is split between the employer and the employee. Under these circumstances, the employee’s share is withheld from his or her paychecks, while the employer is responsible for setting aside its share to be paid quarterly. Under this payment scenario, both the employee and employer are responsible for paying 1.45 percent of the total wages for a given employee.  From the standpoint of the employer, Medicare tax does not have to be collected from individuals who are not regular employees. Independent contractors, for example, are responsible for paying the entire 2.9% for their Medicare tax expenses.

As a result of the flat tax structure, Medicare taxes are very easy to compute. The Medicare tax, however, is only a small part of the total payroll burden. Nevertheless, payroll computations for a given employee can take just a few minutes, depending on the complexity of the employment situation. Considering most businesses have multiple employees, payroll functions – including handling Medicare taxes – are best handled by third-party accounting firm.

In this article, we have review the history of the Medicare Tax and how it is paid.