What Are Medicare Taxes and Who Is Required to Pay Them?

Medicare taxes are a mandatory payroll deduction or a self-employment tax that individuals pay to help fund the Medicare program. This program provides health insurance primarily for individuals aged 65 or older, as well as some younger people with disabilities. The taxes collected play a direct role in maintaining the solvency and functionality of this federal health insurance system.

Standard Medicare Tax Explained

The standard Medicare tax is part of the Federal Insurance Contributions Act (FICA) and is levied on earned income. This tax rate is 2.9% of all earned wages, generally split evenly between employees and employers. For employees, 1.45% is withheld from their paychecks, and their employers contribute the matching 1.45%.

Self-employed individuals are responsible for paying both the employee and employer portions, totaling the full 2.9% as part of their Self-Employment Tax. Unlike Social Security tax, there is no wage base limit for the standard Medicare tax; every dollar of earned income is subject to this tax. Funds collected from this tax are allocated to Medicare Part A, covering hospital insurance benefits like inpatient hospital care, skilled nursing facility care, and hospice services.

How Medicare Taxes are Collected

The method of collecting Medicare taxes differs depending on an individual’s employment status. For employees, their employer is responsible for withholding the employee’s 1.45% share directly from paychecks. The employer then remits this amount to the IRS, along with their matching 1.45% contribution.

This withholding is itemized on an employee’s pay stub and reported on their annual Form W-2. Employers must ensure these withholdings and payments are made correctly and on time.

Self-employed individuals manage their Medicare tax obligations differently as they do not have an employer to withhold taxes. They are responsible for both the employee and employer portions, totaling 2.9% of their net self-employment earnings. This amount is calculated as part of their Self-Employment Tax, which also includes Social Security taxes.

Self-employed individuals generally pay these taxes throughout the year via estimated tax payments, typically made quarterly, and report them annually on Schedule SE (Form 1040).

Understanding the Additional Medicare Tax

Beyond the standard Medicare tax, certain higher-income earners are subject to an Additional Medicare Tax. This is a separate 0.9% tax applied to earned income that exceeds specific thresholds. Unlike the standard Medicare tax, this additional tax is solely the responsibility of the individual; employers do not contribute a matching portion.

The income thresholds for this additional tax vary based on tax filing status. For single individuals, the threshold is $200,000, for married couples filing jointly it is $250,000, and for married individuals filing separately it is $125,000.

Employers must begin withholding this 0.9% Additional Medicare Tax once an employee’s wages for the calendar year exceed $200,000, regardless of their filing status. If an individual has multiple employers or significant self-employment income, they may need to make estimated tax payments or adjust their withholding on Form W-4. This ensures the correct amount of tax is paid if their combined income exceeds the applicable threshold.

Important Distinctions and Exceptions

It is important to differentiate the Medicare tax from other related financial aspects. Medicare tax is a payroll or self-employment tax on earned income, whereas Medicare premiums are payments made by beneficiaries for coverage such as Medicare Part B or Part D. While both contribute to the Medicare system, their nature and payment mechanisms are distinct.

A notable difference exists between Medicare tax and Social Security tax, both of which fall under FICA. Social Security tax has an annual wage base limit, meaning earnings above a certain amount are not subject to the tax. In contrast, Medicare tax has no such limit; all covered wages are subject to it.

While Medicare tax applies to earned income like wages and self-employment earnings, investment income is generally not subject to Medicare tax. However, certain high-income individuals may be subject to the Net Investment Income Tax (NIIT), a separate 3.8% tax on investment income that also helps fund Medicare.

While the vast majority of earned income is subject to Medicare tax, there are a limited number of specific exceptions. These might include certain non-resident aliens, some government employees hired before specific dates, or members of recognized religious groups with an approved exemption from self-employment tax. These exceptions do not apply to the general working population.