Do I Pay Medicare Tax? Who Pays and On What Income
Understand how Medicare tax applies to you. Clarify your specific payment responsibilities and the income sources involved.
Medicare tax is a federal payroll tax that funds Medicare, a comprehensive health insurance program. This tax provides healthcare benefits primarily for individuals aged 65 or older, and certain younger individuals with disabilities. It represents a fundamental component of the U.S. tax system, ensuring resources are available to support the healthcare needs of eligible beneficiaries. The tax contributes to the Hospital Insurance Trust Fund, specifically allocated for Medicare Part A services. These services cover inpatient hospital care, skilled nursing facility care, hospice, and some home health services.
What is Medicare Tax
Medicare tax is a component of the Federal Insurance Contributions Act (FICA) tax, which is withheld from earnings. For employees, the standard Medicare tax rate is 1.45% of gross wages, with employers contributing a matching 1.45% for a combined total of 2.9%. Self-employed individuals pay the full 2.9% on their net earnings from self-employment. Unlike Social Security tax, there is no wage base limit for Medicare tax. This means all covered wages and net earnings from self-employment are subject to the tax, regardless of the amount earned.
Who is Subject to Medicare Tax
Employees have Medicare tax withheld from their paychecks, with both the employee and their employer contributing a share. Employers are responsible for matching the employee’s contribution. Self-employed individuals, including sole proprietors and independent contractors, pay the entire Medicare tax themselves, as they act as both employee and employer. This self-employment tax encompasses both Social Security and Medicare taxes.
Household employees may also be subject to Medicare tax if they meet specific wage thresholds. General rules apply to partners in partnerships. Limited exemptions exist for certain non-resident aliens, some state and local government employees hired before specific dates, or members of certain religious groups who have conscientiously objected to public insurance benefits. These exemptions are rare and apply under very specific circumstances.
Income Subject to Medicare Tax
For employees, income subject to Medicare tax includes salaries, hourly wages, bonuses, commissions, and reported tips. Certain taxable fringe benefits, such as the personal use of a company vehicle, are also considered taxable wages.
For self-employed individuals, Medicare tax applies to their net earnings from self-employment. This amount is calculated by subtracting allowable business deductions from gross income. Only 92.35% of these net earnings are subject to self-employment tax, which includes the Medicare portion. This adjustment accounts for the employer-equivalent portion of the self-employment tax.
Income generally not subject to Medicare tax includes investment income like dividends, capital gains, and interest, unless directly attributable to self-employment activities. Rental income, unless from a real estate business, and pension, retirement, or Social Security benefits are also exempt.
Additional Medicare Tax
High-income earners may be subject to an Additional Medicare Tax. This extra 0.9% tax applies to Medicare wages, self-employment income, and Railroad Retirement (Tier 1) compensation exceeding specific thresholds. This additional tax was introduced as part of the Affordable Care Act.
Thresholds vary by filing status: $200,000 for single filers, heads of household, and qualifying widow(er)s; $250,000 for married individuals filing jointly; and $125,000 for those married filing separately. Employers are required to withhold this 0.9% Additional Medicare Tax from an employee’s wages once they exceed $200,000 in a calendar year, regardless of the employee’s filing status. This withholding obligation exists even if the employee might not ultimately owe the tax based on their total income and filing status. Employers do not pay a matching portion for the Additional Medicare Tax.
Paying Medicare Tax
The method for paying Medicare tax depends on employment status. For employees, Medicare tax is automatically withheld from each paycheck by their employer. This withheld amount, along with Medicare wages and tips, is reported in Box 5 and Box 6 of their annual Form W-2.
Self-employed individuals pay the full self-employment tax, including Medicare tax, through estimated tax payments throughout the year. These payments are made quarterly using Form 1040-ES, Estimated Tax for Individuals. Employers remit both the employee’s withheld Medicare tax and their own matching contribution to the IRS.