What Is the Medicare Tax Rate and How Is It Calculated?

Medicare tax is a federal payroll tax that helps fund the Medicare program, a health insurance system for individuals aged 65 or older, and certain younger people with disabilities. This tax is a component of the Federal Insurance Contributions Act (FICA) taxes, which also include Social Security taxes. The primary purpose of the Medicare tax is to support Medicare Part A, specifically covering hospital insurance, skilled nursing facility care, hospice care, and some home health services.

Standard Medicare Tax Rates

The standard Medicare tax rate is applied to all earned income without any wage base limit, meaning every dollar of wages or net self-employment income is subject to this tax. For employees, the Medicare tax rate is 1.45% of their gross wages. Employers are required to match this contribution, paying an additional 1.45% on their employees’ wages. This results in a combined Medicare tax rate of 2.9% on an employee’s wages, split evenly between the employee and the employer.

For individuals who are self-employed, the Medicare tax rate is 2.9% of their net earnings from self-employment. This rate effectively covers both the employee and employer portions of the Medicare tax, as self-employed individuals are responsible for the entire contribution. This tax is part of the broader self-employment tax, which also includes Social Security contributions. Unlike the Social Security tax, the Medicare tax applies to all covered wages and net self-employment earnings.

Additional Medicare Tax

An Additional Medicare Tax of 0.9% applies to certain higher-income individuals. This additional tax is levied on Medicare wages, self-employment income, and Railroad Retirement (RRTA) compensation that exceed specific threshold amounts based on the taxpayer’s filing status. For single filers, heads of household, and qualifying widow(ers), the threshold is $200,000. Married couples filing jointly face a threshold of $250,000, while those married filing separately have a threshold of $125,000.

This tax is solely the responsibility of the employee or self-employed individual. Employers do not match this additional 0.9% portion. For high-income earners, the total Medicare tax rate can be 2.35% (1.45% standard + 0.9% additional) on wages above the threshold, or 3.8% (2.9% standard + 0.9% additional) on self-employment income above the threshold.

Who Pays and How it is Calculated

For employees, Medicare tax is withheld from their paycheck by their employer. The employer calculates the 1.45% employee portion based on gross wages and remits it to the Internal Revenue Service (IRS). Concurrently, the employer also contributes their matching 1.45% share. If an employee’s wages exceed $200,000 in a calendar year, the employer is responsible for withholding the additional 0.9% Medicare tax from wages paid above that amount, regardless of the employee’s filing status. This withholding continues for the remainder of the calendar year once the threshold is met.

Self-employed individuals are responsible for paying both the employee and employer portions of the Medicare tax, totaling 2.9% of their net earnings from self-employment. This is paid as part of their self-employment tax. This calculation is reported on Schedule SE (Form 1040), Self-Employment Tax, which is filed with their annual income tax return.

If a self-employed individual’s income exceeds the Additional Medicare Tax thresholds, they must also calculate and pay the extra 0.9% on the amount above the applicable threshold. This additional tax calculation for self-employed individuals and employees is reconciled on Form 8959, Additional Medicare Tax. Individuals may need to make estimated tax payments throughout the year to cover their self-employment tax and any Additional Medicare Tax liability, especially if they do not have sufficient withholding from other sources. Failure to do so can result in penalties.