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Tax Talk with George Saenz

Ask the tax adviser

No limit to Medicare taxes

Dear Tax Talk:
Is there a cutoff (like Social Security) where Medicare is not taken out of an employee's pay?

Dear Michael:
It used to be that Social Security and Medicare were applied to the same wage base limit. The law was changed starting in 1991 so that Medicare cut out at a higher limit. In 1994, the law changed to eliminate a maximum wage base for Medicare.

Social Security is withheld from an employee at the rate of 6.2 percent on the first $84,900 in earnings from the same employer in 2002. Medicare tax is withheld at the rate of 1.45 percent on all wages without a limit. The employer matches the contributions.

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A self-employed individual pays double these rates on their net earnings from self-employment. A self-employed individual can deduct one-half of the self-employment tax in computing taxable income; an employee gets no deduction. When an individual retires, up to 85 percent of Social Security benefits are taxable depending on other income; Medicare benefits are not taxable.

Although an employee cannot avoid the Medicare tax, a self-employed individual can effectively cap the limit by incorporating. This makes some sense to a self-employed individual as it represents an almost 3 percent tax savings.

-- Posted: Aug. 13, 2002

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