What Are Medicare Wages?
Medicare wages are employee earnings that are subject to a U.S. payroll tax known as the Medicare tax. Similar to the other U.S. payroll tax, Social Security, the Medicare tax is used to fund the government's Medicare program, which provides subsidized healthcare and hospital insurance benefits to retirees and the disabled. Medicare and Social Security taxes are levied on both employees and employers.
Understanding Medicare Wages
The employee's share of the Medicare tax is a percentage withheld from his or her income. For example, in 2020, the Medicare tax was 1.45% on the first $200,000 of wages ($250,000 for joint returns and $125,000 for married taxpayers filing a separate return). Employers also pay 1.45%. There's also a 0.9% Additional Medicare Tax that only the employee pays for wages that exceed $200,000 (still $250,000 for joint returns and $125,000 for married taxpayers filing a separate return).
As of 2020, the current rate for the Social Security Tax is 6.2% for the employee and 6.2% for the employer, or 12.4% total. The tax applies to the first $137,700 of wages (for 2020). The Social Security tax rate is assessed on all types of income that an employee earns, including salaries, wages, and bonuses.
Medicare wages fund the Medicare tax, which funds the government's Medicare program.
Medicare Tax for the Self-Employed
The Medicare tax on the first $137,700 of a self-employed individual’s income is 2.9%, while the Social Security tax rate is 12.4% in 2020. The maximum Social Security tax for self-employed people in 2020 is $17,074.80.
Self-employed individuals must pay double the Medicare and Social Security taxes as traditional employees because employers typically pay half of these taxes. However, self-employed individuals are allowed to deduct half of their Medicare and Social Security taxes from their income taxes.
The CARES Act of 2020
On March 27, 2020, President Trump signed a $2 trillion coronavirus emergency stimulus package, called the CARES (Coronavirus Aid, Relief, and Economic Security) Act, into law. It expands Medicare's ability to cover treatment and services for those affected by COVID-19. The CARES Act also:
- Increases flexibility for Medicare to cover telehealth services.
- Authorizes Medicare certification for home health services by physician assistants, nurse practitioners, and certified nurse specialists.
- Increases Medicare payments for COVID-19-related hospital stays and durable medical equipment.
For Medicaid, the CARES Act clarifies that non-expansion states can use the Medicaid program to cover COVID-19-related services for uninsured adults who would have qualified for Medicaid if the state had chosen to expand. Other populations with limited Medicaid coverage are also eligible for coverage under this state option.
Employee Retirement Options
In addition to noting particular withdrawals for Medicare and Social Security in each paycheck, an employee should consider options for saving for retirement. In many cases, they can elect to have a portion removed from their paychecks for this purpose. Many employers offer certain types of retirement plans, depending on the length of time an employee has been with an organization (i.e., vesting) and the type of organization (e.g., company, non-profit, or government agency).
For example, many companies offer 401(k)s. A 401(k) is a qualified employer-sponsored retirement plan into which eligible employees may make salary deferral contributions. Earnings in a 401(k) plan accrue on a tax-deferred basis. A 403(b) plan is a retirement plan, comparable to a 401(k) plan yet specifically for employees of public schools, tax-exempt organizations and certain ministers.
These plans can invest in either annuities or mutual funds. A 403(b) plan lets employees invest in a tax-sheltered annuity plan or a designated Roth account. A 457 plan is a common plan offered to state and local government employees. Individuals may also opt to start their own IRA in the event an employer does not offer satisfactory retirement benefits, or to save for retirement in addition to the money saved in their employer-offered plan. Taxpayers can enjoy the benefit of saving money in a traditional IRA tax-free and pay tax on the money in retirement.