Does Everyone Have to Pay Medicare Tax?
While nearly all workers pay Medicare tax, the liability structure is not flat. It extends to all earnings and includes supplemental taxes for high incomes.
Medicare tax is a federal employment tax that funds a portion of the Medicare health insurance program. This program primarily covers individuals aged 65 or older, but also extends to younger people with specific disabilities and those with End-Stage Renal Disease. The revenue collected is specifically designated for Medicare Part A, which covers hospital insurance, skilled nursing facility care, hospice, and some home healthcare services.
Who Pays Medicare Tax
The responsibility for paying Medicare tax applies to most of the American workforce through two mechanisms. The Federal Insurance Contributions Act (FICA) governs payroll taxes for employees. Under FICA, the tax is split evenly; the employee pays a portion through mandatory payroll withholding from their gross wages, and the employer pays a matching amount.
For individuals who work for themselves, such as independent contractors or small business owners, the Self-Employment Contributions Act (SECA) applies. SECA requires self-employed individuals to cover both the employee and employer portions of the Medicare tax. This is calculated on Schedule SE and filed with their annual income tax return.
Calculating the Standard Medicare Tax
For employees, the Medicare tax rate is 1.45% of their gross wages, which is withheld from their paychecks. Their employer is responsible for matching this amount, contributing an additional 1.45%. This brings the total contribution for an employed individual to 2.9% of their wages.
Self-employed individuals are responsible for this entire 2.9% rate on their net earnings from self-employment. A feature of the Medicare tax is that, unlike Social Security, there is no annual wage base limit. All covered wages and self-employment income are subject to Medicare tax, regardless of how high an individual’s earnings are.
Additional Taxes for High-Income Earners
Higher-income taxpayers may be subject to an Additional Medicare Tax. This tax is a 0.9% rate applied to wages, compensation, and self-employment income that exceed specific thresholds. The income thresholds are $250,000 for Married Filing Jointly, $125,000 for Married Filing Separately, and $200,000 for all other filers. This tax is paid only by the employee, as there is no employer match. Employers begin withholding this tax once an employee’s wages exceed $200,000, and taxpayers use Form 8959 to report this liability on their annual tax return.
Separate from the tax on earned income, some individuals must also pay a Net Investment Income Tax (NIIT). This is a 3.8% tax on the lesser of either net investment income or the amount by which modified adjusted gross income (MAGI) exceeds the same income thresholds. While the revenue from the NIIT supports Medicare, it applies to unearned income sources like interest, dividends, and capital gains. For example, a single filer whose MAGI exceeds the $200,000 threshold by $30,000 would owe the 3.8% NIIT on that $30,000. The NIIT is calculated and reported on Form 8960.
Exemptions from Medicare Tax
While the requirement to pay Medicare tax is widespread, specific exemptions exist for certain individuals and types of income. These exemptions are available for particular groups, including:
- Certain nonresident aliens, such as students on F-1 visas performing work for their educational institution.
- Employees of foreign governments and international organizations.
- Members of recognized religious sects who are conscientiously opposed to public insurance and file Form 4029 to apply for an exemption.
- Some government employees hired before 1984 who are covered by a qualifying public retirement system.
Additionally, certain payments are not considered wages for FICA purposes and are therefore not subject to Medicare tax. These can include employer-provided health insurance and payments from workers’ compensation.