For many people, the only thing they see when they receive their first teenage salary is the amount of money they deduct from their gross salary. It does not help that the amounts extracted appear in archaic terms such as “FICA tax” or “federal withholding tax”.
In this article, we’ll explore a part of the FICA (Federal Insurance Contributions Act): the Medicare tax. Let’s see how to calculate the amount due for each payment period, as well as how to report and pay it.
Contents
What is Medicare Tax?
The Medicare Program was enacted into law in 1965 to provide health insurance for people over the age of 65 and younger people with certain disabilities as defined by the Social Security Administration.
Social Security is the other part of FICA, and Medicare was originally approved under the Social Security Act.
Like Social Security, Medicare works by collecting pay for someone’s years of work to use when they are older. Workers have their Medicare tax deducted from their pay, which is then funded by health insurance that they may not be able to pay or may not be entitled to at a certain age once they retire.
Today, the Medicare program has expanded massively since its inception and covers most of the medical problems that arise for the elderly.
Due to the size of the program, the government uses its influence to negotiate lower prices for covered care. Politicians have begun campaigning for a plan to offer “Medicare for All” and the CARES Act of 2020 allows Medicare funds to be used for additional purposes in the treatment of COVID-19.
Medicare should not be confused with Medicaid, which is a similar program that provides health care to low-income people and is not funded by payroll taxes.
What is the role of the employer in Medicare tax?
Medicare is one of the many business taxes for which the employer is responsible for calculating, reporting and paying. The employee and the employer share the cost of the tax, and both pay half.
Items such as Medicare tax, benefits, and other marginal costs (collectively referred to as the “workload” in accounting) must come into play when negotiating a new job and budget.
Workload costs build up quickly, and if only the base salary is taken into account in the budget, projects with unexpectedly low or even negative margins can be seen.
Companies should calculate the total Medicare tax owed on each payroll, withhold half of the employee’s income and pay the other half.
How do small businesses report Medicare tax?
Each payroll period, the IRS requires companies to report and pay the federal, Social Security, and Medicare withholding amounts to be paid for that period. The easiest way to do this is with the IRS EFTPS.
Your payroll or payroll software provider should issue an EFTPS report for each period showing the amounts for each category and the total. This information is reported online or called, and the IRS withdraws the payment directly from the payroll account set up for the company.
Companies must complete the IRS Form 941 each quarter (always make sure you have the most up-to-date version of this form from the IRS website) and submit it to the IRS. This form includes each of the EFTPS payments made during this quarter.
Finally, at the end of the year, the company will send W-2 to each employee, as well as to the IRS showing each employee’s gross income and all withholding taxes, including Medicare.
Medicare and SECA tax
Employers are not required to pay a portion or withhold a portion of FICA taxes for hired employees. Contractors are usually assigned projects and completed on time and possibly at the location of your choice.
Contractors must complete an IRS W-9 form and be sent a Form 1099 at the end of the year.
Contractors, in accordance with the Self-Employed (or SECA) Contributions Act, must pay the full portion of FICA taxes (15.3% plus 0.9% for income in excess of $ 200,000) for your account. Similarly, individual homeowners are required to pay FICA taxes on the amount of their income that meets the requirements for self-employment taxes.
Use the IRS SE schedule to determine how much you personally owe on Medicare taxes based on what was reported on your corporate tax return. The good news is that half of the amount paid under the SECA can be deducted from the individual’s total income when calculating income tax.
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