Taxable Income

• Medicare HI tax is payable on all earned income. Workers receive a W-2 Wage and Tax Statement from their employer at tax time. The amounts of income subject to income taxes, Social Security taxes and Medicare taxes are listed in different boxes. Individuals do not pay Social Security tax on amounts of income they earn above $106,800 during the year. However, although some income is excluded from federal income or Social Security taxes, that is not the case with Medicare. Individuals pay Medicare taxes on all wages, tips and other earned compensation, which includes contributions to an individual's 401(k) plan.
  
  

Tax Rate

• The federal government sets the amount of Medicare tax. Although people talk about FICA taxes as if they were one unit, the Social Security and Medicare taxes have different rates. The Medicare tax rate was 2.9 percent of wages, as of January 2011, with employers and employees each paying one-half of that amount, while self-employed individuals pay the entire amount of the tax alone. Medicare taxes are figured on gross income before deductions.
  
  

Figuring Tax

• Figuring the Medicare tax is straightforward. Multiply the total amount of gross income by the full 2.9 percent for self-employed individuals, or by 1.45 percent to find the amount that an employer and an employee each pay. Because there is no wage base, both employers and employees each continue to pay 1.45 percent of all wages earned no matter how much money an individual earns.
  
  

Changes Coming

• Individuals currently pay Medicare taxes on earned income. However, that might change in 2013 when certain provisions of the federal health care reform law, passed by Congress in 2010, take effect. Under those provisions, the Medicare tax rate would increase for certain high-wage individuals. In addition, individuals would pay Medicare tax on investment income from sources such as interest, dividends, most capital gains, rental properties and trust funds. In addition, the new law will require high-income individuals -- defined as singles earning more than $200,000 or couples earning more than $250,000 -- to pay an extra 0.9 percentage points in Medicare tax beginning in 2013.