What Percentage of Income Is Medicare Tax?

Medicare tax is a federal payroll tax that helps fund the Medicare program, the federal health insurance initiative primarily 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 tax. The revenue collected through Medicare tax specifically supports Medicare Part A, which covers hospital-related expenses. It ensures the program remains financially stable, enabling eligible individuals to access essential healthcare services.

Standard Medicare Tax Rates

The standard Medicare tax rate is 2.9% of an individual’s wages. This amount is typically split between the employee and the employer. Employees contribute 1.45% of their gross income, while employers pay a matching 1.45%. For example, if an employee earns $1,000, $14.50 is deducted from their paycheck for Medicare tax, and their employer also contributes $14.50.

The standard Medicare tax has no wage base limit, meaning all earned income is subject to this tax. Unlike Social Security tax, which has an annual wage cap, Medicare tax applies to every dollar of an employee’s wages. Self-employed individuals pay both the employee and employer portions, resulting in a total rate of 2.9% on their net earnings from self-employment.

Additional Medicare Tax

An additional Medicare tax applies to high-income earners. This tax is an extra 0.9% on earned income above certain thresholds. For single filers and heads of household, the threshold is $200,000. Married individuals filing jointly face a threshold of $250,000, while those married filing separately have a threshold of $125,000.

This additional tax applies to wages, self-employment income, and railroad retirement compensation exceeding these income levels. Employers must begin withholding this 0.9% additional tax once an employee’s wages for the year surpass $200,000, regardless of the employee’s filing status. Employers do not pay a matching share for this additional tax; it is solely the responsibility of the employee or self-employed individual.

Income Subject to Medicare Tax

Medicare tax applies to earned income, including wages, salaries, and tips received by employees. For self-employed individuals, the tax is levied on their net earnings from self-employment, calculated after deducting business expenses.

Certain types of income are generally not subject to Medicare tax. For instance, investment income such as capital gains, interest, and dividends typically does not incur Medicare tax, unless directly derived from a trade or business. These rules regarding taxable income apply consistently to both the standard Medicare tax and the additional Medicare tax.

How Medicare Tax is Collected

For employees, Medicare tax is collected through payroll withholding. Employers are responsible for deducting the employee’s share directly from their paychecks. Employers then remit both the employee’s withheld portion and their own matching share to the Internal Revenue Service (IRS).

Employers also have reporting obligations, including filing Form 941, Employer’s Quarterly Federal Tax Return, to report federal income, social security, and Medicare taxes withheld from employees’ paychecks, along with the employer’s share. At the end of the year, employers provide employees with Form W-2, Wage and Tax Statement, which details the Medicare taxes withheld. Self-employed individuals pay their Medicare tax obligations through estimated tax payments throughout the year, typically using IRS Form 1040-ES, Estimated Tax for Individuals. This form helps them calculate and remit payments for income not subject to withholding.