Do Retirees Pay Medicare Tax on Retirement Income?
Are retirees subject to Medicare tax? Get clear answers on how various retirement income sources are taxed.
Medicare tax is a federal tax that helps fund the Medicare program, providing health insurance primarily for individuals aged 65 or older and some younger people with disabilities. It is a component of the Federal Insurance Contributions Act (FICA) tax, which also includes Social Security tax. This article clarifies when retirees may or may not pay Medicare tax.
Understanding Medicare Tax
Medicare tax is levied on earnings to support the Hospital Insurance (HI) portion of Medicare, also known as Medicare Part A. This tax is a mandatory payroll deduction for most working individuals in the United States. For employees, the Medicare tax rate is 1.45% of all covered wages, with employers paying a matching 1.45%, totaling 2.9%.
Self-employed individuals pay the full 2.9% on their net earnings from self-employment, covering both employee and employer portions. Unlike Social Security tax, there is no wage base limit for Medicare tax, meaning all earned income is subject to it. An extra 0.9% Additional Medicare Tax applies to earned income exceeding $200,000 for single filers and $250,000 for married couples filing jointly. This additional tax has no employer match.
Retirement Income and Medicare Tax
Most common forms of retirement income are not subject to Medicare tax. Distributions from traditional retirement accounts, such as pensions, 401(k)s, and Individual Retirement Accounts (IRAs), are considered “unearned income” for FICA tax purposes. Therefore, these distributions do not incur the Medicare portion of FICA taxes. While these distributions are subject to federal income tax, they are distinct from Medicare payroll taxes.
Social Security benefits are not directly subject to Medicare tax. Medicare tax is primarily linked to earned income, such as wages and net earnings from self-employment. A portion of Social Security benefits may be subject to federal income tax depending on your combined income, but this is separate from Medicare tax liability.
Medicare Tax on Post-Retirement Employment
If a retiree continues to work as an employee after formally retiring, their wages or salary from this employment remain subject to Medicare tax. This applies regardless of their retirement status or whether they are already receiving retirement benefits. Since this income is considered “earned income,” it falls under the standard FICA rules.
The employer will continue to withhold the 1.45% employee portion of the Medicare tax from each paycheck, and the employer will contribute the matching 1.45%. If the retiree’s earned income from employment exceeds the applicable threshold ($200,000 for single filers, $250,000 for married filing jointly), the Additional Medicare Tax of 0.9% will also apply to the wages above that amount.
Medicare Tax for Self-Employed Retirees
Retirees who engage in self-employment activities, such as freelance work, consulting, or operating a small business, are subject to self-employment tax on their net earnings. This self-employment tax encompasses both Social Security and Medicare taxes. The Medicare portion of this tax is 2.9% of net earnings from self-employment.
Unlike employed individuals who split the Medicare tax with an employer, self-employed retirees are responsible for paying both the employer and employee portions themselves. This tax is calculated on Schedule SE, Form 1040, and is due if net earnings from self-employment are $400 or more. If a self-employed retiree’s net earnings exceed the Additional Medicare Tax thresholds, the extra 0.9% will also apply to their self-employment income above those limits.