Do You Still Have to Pay Medicare Tax After Age 65?

Medicare tax funds a significant portion of the U.S. Medicare program. Many individuals wonder if their obligation to contribute changes once they reach age 65, a common age for Medicare eligibility. This article clarifies how Medicare tax applies to various income types and individuals, regardless of age.

Medicare Tax Beyond Age 65

There is no age-based exemption from Medicare tax. Individuals continue to pay Medicare tax on their earned income as long as they are working, even if they are already receiving Medicare benefits. This applies whether one is an employee or self-employed. The tax supports the Medicare program, particularly Medicare Part A, which covers hospital insurance.

For employees, Medicare tax is part of the Federal Insurance Contributions Act (FICA) tax, automatically withheld from wages. The standard Medicare tax rate is 2.9% of earned income, split evenly between the employee and the employer, with each paying 1.45%. An employee’s paycheck will continue to have 1.45% deducted for Medicare tax, regardless of their age.

Self-employed individuals pay both the employee and employer portions of the Medicare tax. This amounts to the full 2.9% of their net earnings from self-employment, reported on their federal income tax return.

Income Subject to Medicare Tax

Medicare tax primarily applies to earned income, including wages and net earnings from self-employment. There is no income cap on the Medicare tax, meaning all earned income is subject to this tax.

Conversely, many common income sources for individuals over 65 are not subject to Medicare tax. Social Security benefits, for instance, are not taxed for Medicare purposes. Distributions from traditional retirement accounts, such as pensions, traditional Individual Retirement Accounts (IRAs), and 401(k) plans, are exempt from Medicare tax.

Investment income, including interest, dividends, and capital gains from the sale of stocks or bonds, also does not incur Medicare tax. This distinction is important for retirees whose income streams often shift from earned wages to retirement distributions and investment returns. While these income types are not subject to Medicare payroll tax, some may be considered for other taxes on high-income individuals.

Additional Medicare Tax for High Earners

A separate tax, known as the Additional Medicare Tax, applies to higher-income individuals. This 0.9% tax is levied on earned income exceeding specific thresholds and has no age exemption. It applies to wages, self-employment income, and railroad retirement Tier 1 compensation.

The income thresholds for the Additional Medicare Tax are $200,000 for single filers, $250,000 for married couples filing jointly, and $125,000 for married individuals filing separately. Employers must withhold this additional 0.9% once an employee’s wages exceed $200,000 in a calendar year, regardless of filing status. Individuals may need to make estimated tax payments if their total income or filing status results in additional tax liability beyond what is withheld.

The Additional Medicare Tax differs from the Net Investment Income Tax (NIIT). The NIIT is a 3.8% tax on certain investment income for high-income individuals, applying to sources like interest, dividends, capital gains, rents, and royalties. While both taxes target higher earners, the Additional Medicare Tax applies to earned income, while the NIIT applies to net investment income.

Medicare Tax vs. Medicare Premiums

Medicare tax and Medicare premiums serve different purposes, although both contribute to the funding of the Medicare program. Medicare tax is a payroll tax, deducted from earned income, that primarily funds Medicare Part A, which covers hospital insurance. This tax is a mandatory contribution for workers throughout their careers.

Medicare premiums, conversely, are monthly payments made by beneficiaries for their Medicare coverage. These include premiums for Medicare Part B (medical insurance) and Part D (prescription drug coverage). Unlike the Medicare tax, these premiums are based on enrollment choices and, for some, on income levels.

Higher-income beneficiaries may pay an Income-Related Monthly Adjustment Amount (IRMAA) in addition to their standard Part B and Part D premiums. This surcharge is determined by their Modified Adjusted Gross Income (MAGI) from two years prior. The IRMAA ensures that individuals with higher incomes contribute more to their Medicare coverage costs.