What Is Medicare Employee Tax and How Does It Work?
Demystify Medicare employee tax. Learn its core function, calculation, and how it's processed to support vital health programs.
Medicare employee tax is a federal payroll tax that funds the Medicare program. This program provides health insurance coverage for eligible individuals, primarily those aged 65 or older, and certain younger people with disabilities. The tax contributes to the financial foundation of Medicare, which helps cover hospital stays, skilled nursing care, hospice, and some home healthcare services.
Understanding Medicare Employee Tax
Medicare employee tax is a component of the Federal Insurance Contributions Act (FICA) tax, which also includes Social Security tax. FICA taxes are mandatory payroll taxes that fund these two significant federal programs. The Medicare portion of FICA is specifically allocated to the Medicare Trust Funds, supporting various aspects of the health insurance program.
Both employees and employers share the responsibility for funding Medicare through this tax. Employees have their share automatically withheld from their paychecks. Employers contribute a matching amount to the employee’s contribution. Self-employed individuals, however, are responsible for paying both the employee and employer portions of the Medicare tax through self-employment tax.
Calculating Medicare Employee Tax
The standard Medicare tax rate is 1.45% of an employee’s gross wages. Unlike Social Security tax, which has a wage base limit, there is no income cap for Medicare tax. This means all earned income is subject to the 1.45% Medicare tax rate. For instance, if an employee earns $50,000, the entire amount is subject to the 1.45% tax.
An additional Medicare Tax of 0.9% applies to higher earners. This additional tax is levied on wages, self-employment income, and Railroad Retirement (RRTA) compensation that exceed certain income thresholds. For 2025, the thresholds are $200,000 for single filers, $250,000 for married couples filing jointly, and $125,000 for married individuals filing separately. This means a high-earning employee would pay a combined 2.35% (1.45% + 0.9%) on income exceeding these thresholds. Employers are not required to match this additional 0.9% tax.
How Medicare Tax is Withheld and Paid
For individuals employed by a company, Medicare tax is automatically withheld from each paycheck by their employer. Employers also pay their matching 1.45% contribution, ensuring the total 2.9% for the standard Medicare tax is covered for employees.
Self-employed individuals, who do not have an employer to withhold taxes, are responsible for paying both the employee and employer portions of the Medicare tax. This combined amount, which includes both Social Security and Medicare taxes, is known as self-employment tax. Self-employed individuals typically pay these taxes through estimated tax payments made quarterly throughout the year, using Form 1040-ES.