Employees and employers pay for Medicare during their working years, but don't receive benefits until retirement.
Small employers are required to deduct part of their employees' pay for Medicare insurance. Medicare is a federal health insurance program that covers more than 41 million Americans who are at least 65 years old or who have a disability. Medicare has four parts (A-D), but it is Medicare Part A that provides hospital facility and home health care services that are funded through the payroll tax. While employees pay into the system now, they cannot receive health insurance benefits from it until they meet the eligibility criteria.
Corporations
Corporate employees have 15.3 percent of their pay withheld as FICA tax, which is made up of Social Security and Medicare taxes. Of FICA, 12.4 percent goes toward Social Security and 2.9 percent is paid to Medicare. In addition, the employer pays a matching amount in the employee's name. While Social Security is paid on earnings up to $94,200, Medicare is paid on all earnings.
Self-Employed
If the small employer is actually self-employed, then that person is considered both employer and employee. This means the self-employed individual pays 5.8 percent of his earnings in Medicare taxes and 24.8 percent of earnings in Social Security taxes. This amount has steadily increased over the years. In 1998, it was 12.4 percent in Social Security up to $68,400 and 2.9 percent in Medicare taxes.
S Corporation
With an S corporation, you pay FICA taxes only on the portion of your income that is related to services you provide the company. Any profits you receive as a shareholder are not taxed with FICA. So if you received $100,000 from your company and $75,000 was for services you performed, you would pay the Medicare and Social Security taxes on the $75,000, but not the remaining $25,000.
Tags: Social Security, Medicare taxes, earnings Medicare, paid earnings, percent earnings
