Medicare Taxes Definition:
The tax you withhold from your employees' paychecks to cover the cost of Medicare expenses
If you're preparing your employees' paychecks yourself, you need to be aware of the deductions you must make as set forth by the federal government. You must withhold Social Security and Medicare taxes--these are known as FICA (Federal Insurance Contributions Act) taxes. The FICA tax actually consists of two taxes: a 6.2 percent Social Security tax and a 1.45 percent Medicare tax. To calculate the tax you need to withhold for each employee, multiply an employee's gross wages for a pay period by the tax rates. In addition, as an employer, you are required to pay a matching amount of FICA taxes on each of your employees.
Here's how it works: If an employee has gross wages of $1,000 every two weeks, you must withhold $62 ($1,000 x 0.062) in Social Security taxes and $14.50 ($1,000 x .0145) in Medicare taxes, or $76.50. As an employer, you owe a matching amount as well, so the total amount in FICA taxes to be paid is $153. The maximum amount of wages currently subject to Social Security tax is $87,000. There is no limit on the amount of wages subject to the Medicare tax.
The IRS requires any business paying more than $200,000 annually in payroll taxes or other federal taxes to pay them through the Electronic Federal Tax Payment System (EFTPS). If you pay less than that amount, you can still deliver a check for payroll taxes owed with your deposit coupons to their bank (the same bank as the check is drawn on). The form to use is 8109 (Federal Tax Deposit Coupon). On each coupon show the deposit amount, the type of tax, the period for which you are making a deposit and your phone number. You typically pay these taxes monthly, depending on the size of your business. Approximately five to six weeks after you receive your EIN, the IRS will send you the coupon book.
In addition to making your monthly payroll deposits, you are required to file Form 941 (Employer's Quarterly Federal Tax Return). This is a form that provides the government with information on the federal income taxes you withheld from your employees' pay as well as the FICA taxes you withheld and paid. It also tells the government when the taxes were withheld so the IRS can determine if the federal tax deposit was made on time.