Which Tax Provides for Federal Health Insurance?

Federal health insurance programs are funded primarily through a dedicated payroll tax known as the Medicare tax. This tax directly supports the Medicare program, which provides health coverage to millions of Americans, including individuals aged 65 or older, younger people with specific disabilities, and those with End-Stage Renal Disease.

Understanding the Medicare Tax

The legal basis for the Medicare tax is the Federal Insurance Contributions Act (FICA). FICA establishes a payroll tax that is composed of two distinct parts: the Social Security tax, which funds retirement and disability benefits, and the Medicare tax, which specifically funds hospital insurance. While often discussed together, these two taxes function separately with different rules and rates.

For employees, the Medicare tax is automatically withheld from their paychecks. The standard tax rate is 1.45% of an employee’s gross wages. This amount is matched by the employer, who also contributes 1.45% on behalf of the employee, bringing the total contribution to 2.9% for each worker.

A feature of the Medicare tax is that it applies to all of an employee’s wages and compensation. Unlike the Social Security tax, which has an annual wage base limit ($176,100 in 2025), there is no income cap for the Medicare tax.

The revenue collected from this tax is directed specifically to the Hospital Insurance (HI) Trust Fund. This fund is used to pay for Medicare Part A benefits. Medicare Part A, also known as Hospital Insurance, covers costs associated with inpatient hospital stays, care in a skilled nursing facility following a hospital stay, hospice care, and some home health care services.

The Tax for Self-Employed Individuals

Individuals who work for themselves are also required to contribute to the Medicare system, but through a different mechanism. The Self-Employment Contributions Act (SECA) governs these contributions, serving as the parallel to FICA for the self-employed. The SECA tax encompasses both Social Security and Medicare obligations, similar to the taxes paid by employees and employers.

The Medicare portion of the SECA tax is set at a rate of 2.9%. The reason for this higher rate is that a self-employed individual is considered both the employee and the employer and must therefore cover both shares of the tax.

To account for the employer portion of the tax, self-employed individuals are permitted a deduction. They can deduct one-half of their total SECA tax payment when calculating their adjusted gross income (AGI) on their income tax return. This deduction is an above-the-line adjustment, meaning it can be taken even if the individual does not itemize deductions.

The Additional Medicare Tax

A supplementary tax, known as the Additional Medicare Tax, applies to individuals with earnings that exceed certain high-income thresholds. This tax was introduced as part of the Affordable Care Act and adds a 0.9% tax on top of the standard Medicare rate for those affected.

The income thresholds that trigger this tax depend on a taxpayer’s filing status. For 2025, the 0.9% tax applies to wages and self-employment income over $250,000 for married couples filing jointly, $125,000 for married couples filing separately, and $200,000 for all other filing statuses, including single and head of household. These thresholds are not indexed for inflation and remain fixed from year to year.

The Additional Medicare Tax is borne solely by the employee, with no corresponding employer match for this 0.9% tax. Employers are responsible for beginning to withhold the tax from an employee’s pay once their wages exceed the $200,000 individual threshold in a calendar year, regardless of the employee’s filing status.

How Other Federal Health Programs Are Funded

While the Medicare tax is a primary source of funding for federal health insurance, it does not cover all programs or all parts of Medicare. Other components of the system rely on different funding streams.

Specifically, Medicare Part B (Medical Insurance) and Medicare Part D (Prescription Drug Coverage) are financed differently from Part A. Their funding comes from a combination of beneficiary premiums and the federal government’s general revenues. This means that general tax dollars, not just payroll taxes, play a substantial role in supporting these parts of Medicare.

Medicaid, which provides health coverage to low-income individuals and families, is a joint federal-state program. It is financed through a partnership where costs are shared between the federal government and state governments, with both entities contributing money from their general funds. The federal government’s share, known as the Federal Medical Assistance Percentage (FMAP), varies by state based on per capita income, but there is no specific, dedicated federal payroll tax that funds Medicaid.