What Are Medicare Taxes For and Who Pays Them?
Understand the structure and purpose of Medicare taxes, clarifying their vital role in funding U.S. healthcare.
Medicare taxes are a fundamental component of the U.S. healthcare funding system, supporting medical care for millions of Americans. These taxes directly fund a program that provides health insurance primarily for individuals aged 65 or older, and for certain younger people with disabilities. Understanding Medicare taxation is important for anyone in the U.S. workforce, as it impacts payroll deductions and the broader healthcare landscape.
Components of Medicare Tax
The standard Medicare tax rate is 1.45% for employees and an additional 1.45% for employers, resulting in a combined total of 2.9% on all covered earnings. This tax is a mandatory contribution under the Federal Insurance Contributions Act (FICA). Unlike Social Security taxes, there is no wage base limit for Medicare tax, meaning all earned income is subject to this rate.
For employees, this tax is automatically withheld from paychecks as part of FICA taxes. Employers match the employee’s contribution. Self-employed individuals pay both the employee and employer portions, totaling 2.9% of their net earnings from self-employment. They typically pay these taxes through estimated tax payments throughout the year.
Allocation of Medicare Tax Revenue
The revenue collected from Medicare taxes is specifically earmarked to fund Medicare Part A, which is also known as Hospital Insurance (HI). These tax contributions are deposited into the Hospital Insurance Trust Fund, a dedicated account in the U.S. Treasury. This fund is designed to cover the costs associated with inpatient hospital care, skilled nursing facility care, hospice care, and certain home health care services.
Medicare Part A covers costs for inpatient hospital stays, including services like a semi-private room, meals, general nursing, and drugs. It also covers short-term skilled nursing care after a qualifying hospital stay, and hospice services. Other Medicare parts, such as Part B (Medical Insurance), Part D (Prescription Drug Coverage), and Part C (Medicare Advantage), are funded through separate mechanisms. These rely on beneficiary premiums, general tax revenues, and state payments, not the dedicated Medicare payroll tax.
The Additional Medicare Tax
An Additional Medicare Tax of 0.9% applies to higher-income earners. This tax is levied on Medicare wages, self-employment income, and railroad retirement compensation exceeding specific income thresholds. The threshold is $200,000 for single filers, head of household, or qualifying widow(er). For married individuals filing jointly, it is $250,000, and for those married filing separately, it is $125,000.
This additional tax is solely the responsibility of the employee or self-employed individual; employers do not match this 0.9% contribution. Employers must begin withholding this tax once an employee’s wages exceed $200,000 in a calendar year, regardless of filing status. Self-employed individuals factor this tax into their estimated tax payments. This tax helps fund provisions of the Affordable Care Act.