What is the employee’s portion of the Medicare tax rate?

The employee’s portion of the Medicare tax rate is set at 1.45% of all wages, and there is no upper limit on the amount of earnings that this tax applies to. This means that every dollar of an employee's wage is subject to the Medicare tax, making it unique compared to other payroll taxes that may have earnings caps.

Understanding the structure of Medicare tax is critical, as it contributes to funding healthcare for senior citizens and certain individuals with disabilities. Unlike Social Security tax, which has an income cap for contributions, the Medicare tax does not limit the taxable wage base, resulting in continuous contributions irrespective of how much an employee earns. This characteristic ensures that higher earners contribute proportionally more toward Medicare funding.

The other options do not accurately reflect the Medicare tax rate or the nature of its application. For example, a rate of 2.5% indicates a higher tax burden than is mandated by law, while rates of 1.5% and 1% suggest incorrect percentages that do not align with the established framework. Thus, the correct percentage of 1.45% and its uncapped nature establishes the appropriate understanding of how Medicare tax functions in the context of payroll accounting.