Rules on the Medicare Tax Withheld

Medicare taxes withheld don't appear on your tax return at the end of the year.

Medicare taxes withheld don't appear on your tax return at the end of the year.

On your pay stub, in addition to listing your income taxes withheld, you'll see another amount taken out of Medicare taxes, sometimes called hospital insurance, or abbreviated "HI." The Medicare tax, along with the Social Security tax, make up the Federal Insurance Contributions Act and helps to pay for the cost of running the Medicare system.

Withholding Rate

The Medicare withholding rate is 1.45 percent for employees. Employers must also pay an additional 1.45 percent out of their own pocket. The tax is withheld each time you receive a paycheck. For example, if you get paid $2,000 during a pay period, your employer must withhold $29 from your paycheck for the employee portion of the Medicare tax and must pay an additional $29 for the employer portion. The Medicare tax rate is a flat rate, meaning that it remains the same no matter how much income you earn.

Earned Income Only

The Medicare tax only applies to earned income, which includes your salaries, wages and self-employment income. If you have unearned income, you won't have to have any Medicare tax withheld. For example, if you inherit an IRA and take distributions, or have to take a hardship distribution from your 401(k) plan, those distributions are unearned income no subject to Medicare tax withholding.

Only Affects Employees

Employers only withhold Medicare taxes from your paychecks if you are an employee of the company. If you're an independent contractor, you won't have any taxes withheld. Unfortunately, if you're self-employed, you're responsible for paying self-employment taxes. Companies generally have a lot more control over the work performed by an employee versus an independent contractor. When in doubt, the IRS looks at how much control the employer has over the behavioral and financial aspects of how the work is done, as well as the type of relationship between the employer and employee.

Taxes on Benefits

Sometimes, your employment package includes benefits besides a straight salary, such as medical insurance. Whether your employer must withhold Medicare taxes on these benefits depends on the specific type of benefits. Medical insurance and any contributions to a health savings account or medical savings account are not subject to the Medicare tax. In addition, if you receive lodging as a condition of your employment, the value of that lodging is not subject to Medicare tax withholding. However, any regular wages paid in something other than cash or any bonuses you receive are subject to Medicare tax withholding.


About the Author

Mark Kennan is a writer based in the Kansas City area, specializing in personal finance and business topics. He has been writing since 2009 and has been published by "Quicken," "TurboTax," and "The Motley Fool."

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