The Medicare tax is a mandatory federal tax paid by all U.S. employees and their employers to fund Medicare Part A costs.
The Medicare tax rate contribution is shared equally by your employer and you.
Some people with higher earnings may need to pay two additional Medicare surtaxes.
If you’re self-employed, your Medicare tax rate is higher to include employee and employer portions.
The Medicare tax is a federal payroll income tax first introduced in 1966. It was developed to help fund a major portion of Medicare Part A, also called hospital insurance, for the 19 million Medicare beneficiaries at that time. The tax rate in 1966 was a 0.35% payroll deduction.
Much has changed since then, including the tax rate, Part A’s eligibility criteria and the benefits offered.
In this article we’ll take a closer look at the Medicare tax and how it works.
Medicare Tax: How it Works
The Medicare tax is one part of the Federal Insurance Contribution Act (FICA). It is a mandatory payroll tax. The other required FICA tax is the Social Security tax. If you work in the US, these taxes are automatically deducted from your pay and matched by your employer to fund Medicare hospital insurance (Part A) and Social Security benefits. A set percentage is automatically deducted each month from your paycheck.
The tax collected is held by the U.S. Treasury. Funds collected from the Medicare tax are held as part of the Hospital Insurance (HI) Trust Fund. Other funds that support the Hospital Insurance Trust include:
- Medicare Part A premiums paid by those not eligible for a $0 premium.
- Income tax generated from Social Security benefits.
- Interest earned on trust fund investments.
For those who are self-employed, the Medicare tax deduction percentage is higher in order to include both individual and employer contributions for Social Security and Medicare. This is based on the Self-Employed Contributions Act (SECA). Self-employed individuals pay the Medicare tax and Social Security tax by filing a Schedule SE (Form 1040 or 1040-SR).
How Are Medicare Parts B and D Funded?
Not through taxes — for the most part. To receive Medicare Part B and Medicare Prescription Drug Plan (Part D), you typically have to pay monthly premiums for each. Part B provides medical benefits such as doctors visits, preventive services and medically necessary equipment; Part D helps pay for prescription drug costs for those on Original Medicare. These funds go into another trust fund held by the U.S. Treasury: The Supplementary Medical Insurance (SMI) Trust Fund. Additional funding can also be appointed by Congress through general revenue transfers to help cover costs if needed.
Medicare Tax Benefits
If you’re eligible for Medicare Part A and have worked in the U.S. for at least 10 years, you’re eligible for a no-cost Medicare Part A monthly premium. This means the Medicare taxes you paid while working help pay for a major portion of your Medicare Part A benefits.
Medicare Part A covers the first 60 days of your inpatient hospital costs after you meet the Part A deductible ($1,632 in 2024).
Part A also covers:
- Hospice care
- Skilled nursing care
- Nursing home care
- Home health care
You can still qualify for $0 monthly Part A premiums if an eligible spouse (at least 62 years old) has paid the Medicare tax for at least 10 years. If neither of these apply, you may have to pay the Medicare Part A monthly premium. The amount of your monthly premium will depend on how much Medicare tax you’ve paid by the time you become eligible for Medicare.
In 2020, additional Part A benefits were added as part of the Coronavirus Aid Relief and Economic Security Act (CARES). These include COVID-19 testing, vaccines, monoclonal antibody treatments (lab-made proteins that help your immune system fight an infection), expanded telehealth services, and COVID-19-related hospital costs.
What Medicare coverage is right for my specific situation?Find The Right Plan
The total Medicare tax rate shared by employees and their employers is 2.9%. You and your employer each pay a 1.45% payroll tax as your Medicare tax contribution toward the Hospital Insurance Trust Fund (Part A fund). Someone earning $60,000 yearly would pay $870 in Medicare taxes annually, and their employer would pay the same amount.
However, if you make $200,000 or more annually, you may have to pay additional Medicare tax deductions.
There are different tax rates if you’re self-employed. You are required to pay the full 2.9% on your own as part of the Self-Employed Contributions Act (SECA) tax based on your net income. The tax is based on 92.35% of your net income. You are allowed to take a deduction on half of the tax contribution as a business-related expense.
There is no income limit for Medicare tax. It includes your regular salary and any other types of income such as tips, bonuses, commissions, overtime pay, worker’s compensation or other income-based benefits.
For high-earning individuals, there are two additional taxes or surtaxes that apply for earned income above a specific yearly income threshold. These added taxes were applied in 2013 to pay for costs associated with the Affordable Care Act (ACA).
For those filing as individuals, the high-earning threshold is an annual income above $200,000; $250,000 and above for those filing jointly. The additional Medicare tax rate is 0.9%. This is in addition to the standard 1.45%, for a total tax rate of 2.35% for high-earning individuals. Your employer does not pay this added surtax.
As an example — if you earn $250,000 and file a joint income tax, your Medicare tax contribution would be $5,875.
There is a second surtax that applies to investment income. It is called the Net Investment Income Tax (NIIT), also known as the Unearned Income Medicare Contribution. The tax rate is 3.8% for investment income such as capital gains, dividends, interest or adjusted gross income above the set yearly threshold of $200,000 for individuals, or $250,000 for those filing jointly. The rate is based on whichever is less.
Start your Medicare PlanFit CheckUp today.Call Today
Medicare tax exclusion: Some of your income may be excluded from the Medicare tax. These are pretax deductions which are not subject to the Medicare tax.
For example, deductions for:
- Healthcare savings accounts
- Medical, dental, and vision insurance premiums
- Flexible spending dependent accounts
However, pretax deductions for life insurance or for retirement savings accounts such as 401K savings are subject to Medicare tax.
Are Medicare Premiums Tax Deductible?
Yes. It’s important to know that what you pay for your Medicare each month can work to your advantage. While you’ll want to check your individual return, individuals and couples can often deduct medical (and dental) expenses from their taxes.