What Is Medicare Tax?
Medicare tax is withdrawn from your paycheck automatically to help cover a portion of Medicare Part A (hospital services) for seniors and people with disabilities. The total cost of the Medicare tax is split between you and your employer. If you’re self-employed, you’ll pay Medicare tax as part of your self-employment tax.
Why Do You Pay Medicare Tax?
The Medicare tax is used to fund approximately 88% of Medicare Part A services for seniors and people with disabilities. These funds are used to pay for current services and also “prepay” your premiums for Part A when you become eligible for Medicare.
Medicare Part A premiums are broken down into three categories, outlined below. The amount you are responsible for is based on the number of “quarter credits” that you or a spouse have paid into the system. The maximum amount of quarter credits you can earn in a year is four.
|Under 30 quarter credits||$499 per month|
|30 to 39 quarter credits||$274 per month|
|40+ quarter credits||Premium-free Part A|
All revenue from Part A is put into the Hospital Insurance Trust.
Who Pays Medicare Tax?
Who pays the Medicare tax really depends on your work situation. It tends to be split between you and your employer. If you’re self-employed, you are responsible for both the employee and employer portion.
Your employer should hold both your and their portion of Medicare tax from your paycheck and send it to the IRS. If you’re self-employed, you’re responsible for both portions of this tax. It’s paid with your quarterly estimated self-employment tax payments.
All employees in the United States are required to pay Medicare tax, regardless of citizenship or residency status. For income earned outside of the U.S., reach out to your employer to determine if you’re required to pay it or not.
How Much Is Medicare Tax?
The standard Medicare tax rate is 2.9% for 2022. The table below shows the difference between being self-employed and working for an employer.
|Employee Medicare tax||1.45% from employee and 1.45% from employer|
|Self-employed Medicare tax||2.9% from the self-employed person, paid quarterly.|
What wages are subject to the Medicare tax?
All employment-based earnings are eligible under the Medicare tax. This includes salary, tips, bonuses, and overtime. Furthermore, unlike the Social Security tax, there is no cap on the maximum amount of income that can be taxed.
While some pretax income is exempt from Medicare tax, 401(k) contributions and pretax life insurance payments are not.
Investment income can also be subject to the Medicare tax. This amount is 3.8% of your net investment income or adjusted gross income ― whichever is less. Medicare tax from unearned income does not go to the Hospital Insurance Trust but, instead, goes to a general fund.
What Is the Additional Medicare Tax?
Under the Affordable Care Act (ACA), certain high-income taxpayers are required to pay more than the standard Medicare tax rate. The additional Medicare tax rate is .9% on top of the 2.9% that you pay under the standard rate.
Why Do You Pay the Additional Medicare Tax?
The additional Medicare tax was added in 2013 under the ACA. These funds are used to offer the premium tax credit and additional services:
- Closure of the Part D benefit gap, or “donut hole”
- Inclusion of free vaccines
- Inclusion of free preventive care services
- Inclusion of free screenings for depression, heart disease, diabetes, and some cancers
- Increased chronic care management programs
- Lower premiums for Medicare Advantage (Part C) plans
- Lower prescription drug costs
Who Pays the Additional Medicare Tax?
Not everyone that has earned or unearned income pays the additional Medicare tax. It’s based on predetermined income levels based on your taxable income amounts, as outlined below:
|Single taxpayer||Over $200,000|
|Married, filing jointly||Over $250,000|
|Married, filing separately||Over $125,000|
|Head of Household||Over $200,000|
|Qualified widow with dependents||Over $200,000|
You are responsible for paying the additional Medicare tax, not your employer, and you only pay the additional tax over the threshold above.
How Does Medicare Tax Work?
If you are employed, the Medicare tax is usually taken out of your paycheck by your employer. This amount is combined with their portion of your Medicare tax and then sent to the IRS. You are not required to report your earnings quarterly to the IRS, as your employer does this for you.
If you’re self-employed, you are responsible for withholding the Medicare tax and paying it quarterly as part of your estimated tax payments.
Example of how Medicare tax works
Mary is a single employee and makes $250,000 a year in taxable income. The first $200,000 is taxed at the standard rate of 1.45% for her and 1.45% for her employer. For the remaining $50,000, Mary pays 1.45% + .9% and her employer pays 1.45%.
Learn More From Our Sources
- IRS | Self-Employment Tax | Last accessed September 2023
- Kaiser Family Foundation | FAQs on Medicare Financing | Last accessed September 2023
- Medicare | How to Get Prescription Drug Coverage | Last accessed September 2023