DEFINITION of 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.
BREAKING DOWN Medicare Wages
The employee's share of the Medicare tax is a percentage withheld from his or her income. For example, in 2018, the Medicare tax was 1.45% on the first $200,000 of wages (250,000 for joint returns; or $125,000 for married taxpayers filing a separate return). In addition, according to Code Sec. 3101(b)(2), for wages exceeding $200,000 (still $250,000 for joint returns; or $125,000 for married taxpayers filing a separate return), Medicare tax is 2.35%.
As of 2018, the Social Security Tax was 6.2% on the first $128,700 of wages (although the maximum tax is $7,960.80). Half of the tax is also paid by the employer. The Social Security tax rate is assessed on all types of income that an employee earns including salaries, wages, and bonuses.
Medicare Wages and Employee Retirement Options
In addition to making note of particular withdrawals for Medicare and social security in each paycheck, an employee should consider options for saving for retirement. In many cases, she and he can elect to have a portion removed from her/his paycheck 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 that eligible employees may make salary-deferral contributions to on a post-tax and/or pretax basis. 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 is also another name for a tax-sheltered annuity plan. 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.