Medicare tax is a tax imposed on all American citizens, and its purpose is to finance medical care for people who are 65 years or older. In the year 2020, there have been several changes made to the Medicare tax rules, causing significant effects on how it is calculated and paid. In this article, we will discuss the changes made to the Medicare tax rules for 2020 and the impact it will have on taxpayers.
The Medicare tax is a federal tax, which is imposed to finance the medical care of people who are 65 years and above. It is divided into two parts:
Unlike income tax, which is deducted from the employee's salary, the Medicare tax is a payroll tax paid by both the employee and the employer. The employer is responsible for paying 1.45% of the employee's wages as the employer's share of the tax, and the employee is responsible for paying another 1.45% of their wages as their share of the tax.
There are several changes made to the Medicare tax rules for the year 2020, and they are as follows:
Employees who earn more than $200,000 annually will have to pay an additional 0.9% on wages above the $200,000 threshold. This means that the total Medicare tax for such employees will increase from 1.45% to 2.35%. This additional tax will be withheld from the employee's wages, and employers are required to remit the entire tax to the IRS.
In addition to the increase in Medicare tax for high earners, self-employed individuals will also have to pay an additional 0.9% on their earnings that are above the $200,000 threshold. This increase in tax will apply only to the employee's portion of the Medicare tax obligation since self-employed individuals are responsible for both the employee and employer portions of the Medicare tax.
Unlike Social Security tax, which has a maximum wage base, there is no maximum wage base for Medicare tax. This means that all employees will pay Medicare tax regardless of how much they earn.
Employers are required to withhold the additional Medicare tax from their employees once the employee's wages exceed $200,000 in a given year. The employer is liable for the withholding of this additional tax, and they must remit the entire tax to the IRS. Failure to withhold the tax can result in penalties and interests.
Since self-employed individuals are responsible for both the employer and employee portions of the Medicare tax, they must pay the additional Medicare tax on their own. This means that a self-employed individual who earns more than $200,000 will have to pay an additional 0.9% of their wages above the $200,000 threshold.
The changes made to the Medicare tax rules for 2020 will have significant effects on both the employer and the employee. The increase in Medicare tax for high earners and self-employed individuals will mean that they will have to pay more in taxes. Employers will also be liable for additional withholding of Medicare tax and will have to remit the entire tax to the IRS.
On the other hand, the removal of the maximum wage base means that all employees will pay Medicare tax regardless of their income level. This means that low and middle-income earners will contribute more to Medicare's financing, resulting in better healthcare for all.
In conclusion, the changes made to the Medicare tax rules for 2020 will have significant impacts on both employers and employees. The increase in Medicare tax for high earners and self-employed individuals, the removal of the maximum wage base, and the mandatory additional Medicare tax withholding will result in increased contributions for Medicare's financing. These changes will ultimately help to provide better healthcare for all American citizens over 65 years old.