What Is the Purpose of Medicare Tax?

Medicare tax is a federal payroll tax that funds the nation’s healthcare program for eligible individuals. It is a mandatory contribution and a component of the Federal Insurance Contributions Act (FICA), which also includes Social Security taxes.

Understanding Medicare Tax

Medicare tax is a federal payroll tax collected under the Federal Insurance Contributions Act (FICA). This tax is levied on both employees and employers, and also applies to self-employed individuals. For most wage earners, it is automatically withheld from each paycheck, appearing as a deduction. Self-employed individuals typically pay their Medicare tax obligations as part of their estimated tax payments throughout the year.

How Medicare Tax Funds Healthcare

Revenue from Medicare tax primarily supports Medicare Part A, also known as Hospital Insurance. This portion of Medicare covers inpatient hospital care, skilled nursing facility services, hospice care, and certain home health care services. Funds collected are deposited into the Hospital Insurance (HI) Trust Fund, which pays for these Part A benefits.

Different Types of Medicare Tax Contributions

Contributions to Medicare tax vary based on employment status. Employees typically pay 1.45% of their gross wages, with their employer contributing an additional matching 1.45%. This means a combined total of 2.9% of wages is directed towards Medicare. Unlike Social Security tax, there is no wage base limit for Medicare tax, meaning all covered wages are subject to this tax.

Self-employed individuals are responsible for paying both the employee and employer portions of Medicare tax, totaling 2.9% of their net earnings from self-employment. This is part of the Self-Employment Contributions Act (SECA) tax. For higher earners, an Additional Medicare Tax of 0.9% applies to income exceeding certain thresholds. These thresholds are $200,000 for single filers, $250,000 for married couples filing jointly, and $125,000 for married individuals filing separately.

Medicare Tax and Benefit Eligibility

Paying Medicare taxes contributes to eligibility for premium-free Medicare Part A benefits. This eligibility is earned through “work credits.” Most individuals need to accumulate 40 work credits, which typically equates to 10 years of working and paying FICA taxes, to qualify for premium-free Part A when they turn 65. In 2025, an individual earns one work credit for every $1,810 in earnings, up to a maximum of four credits per year.

These work credits are recorded by the Social Security Administration and remain on an individual’s record regardless of employment changes. While 40 credits are the standard, eligibility can also be granted for individuals with certain disabilities or specific medical conditions like End-Stage Renal Disease (ESRD) or Amyotrophic Lateral Sclerosis (ALS), often with fewer required work credits. If someone does not have enough work credits, they may still enroll in Medicare Part A but typically must pay a monthly premium.