Why Am I Paying Medicare Tax and What Does It Cover?
Gain clarity on the Medicare tax from your paycheck. Learn how this payroll deduction funds hospital insurance and how it's applied at various income levels.
The Medicare tax is a federal payroll tax on your pay stub, often labeled as “FICA” for the Federal Insurance Contributions Act. This tax funds the Medicare health insurance program, which provides coverage to individuals who are 65 or older and some younger people with disabilities. The revenue generated from this tax is used to fund the program for eligible recipients.
The Purpose of the Medicare Tax
The revenue from the Medicare tax is designated to finance Medicare Part A, also known as Hospital Insurance. These funds are not used for general government spending but are channeled directly into the trust funds that pay for healthcare benefits.
Medicare Part A provides coverage for:
- Inpatient hospital care, including semi-private rooms, meals, and nursing services.
- Care in a skilled nursing facility for short-term stays following a qualifying hospital visit.
- Hospice care for terminally ill individuals, covering services and supplies to manage symptoms and provide comfort.
- Home health care services under certain conditions if you are unable to leave your home.
Who is Subject to Medicare Tax
Employees
If you are an employee, the Medicare tax is automatically deducted from your paycheck by your employer. This withholding applies to all your earnings, including wages, salaries, and bonuses. You will see this deduction on your pay stub, typically combined with the Social Security tax under the FICA designation.
Employers
Employers share the responsibility for Medicare tax contributions. For every dollar of Medicare tax withheld from an employee’s wages, the employer is required to contribute an equal amount. This matching contribution is a legal requirement for all employers with eligible employees.
Self-Employed Individuals
Individuals who are self-employed, such as independent contractors or small business owners, must pay both the employee and the employer portions of the Medicare tax. This combined amount is calculated as part of the self-employment tax. These individuals are responsible for calculating their own tax liability and typically make estimated tax payments to the IRS throughout the year.
How Medicare Tax is Calculated
The calculation of the standard Medicare tax is straightforward. For employees, the tax rate is 1.45% of their gross earnings. Their employer also pays a matching 1.45%, bringing the total contribution to 2.9% for each employee. For those who are self-employed, they are responsible for the entire 2.9% themselves, which is calculated on their net earnings from self-employment.
The Medicare tax applies to all of an individual’s earned income. Unlike the Social Security tax, which has an annual income limit that adjusts yearly, there is no wage base limit for Medicare. Every dollar you earn from wages or self-employment is subject to this tax, regardless of how high your income is.
The Additional Medicare Tax
A separate tax, known as the Additional Medicare Tax, applies to higher-income earners. This is a 0.9% tax levied on earnings that exceed specific thresholds based on a taxpayer’s filing status, and it is paid on top of the standard 1.45% Medicare tax.
The income thresholds that trigger this tax are based on filing status:
- $250,000 for Married Filing Jointly
- $125,000 for Married Filing Separately
- $200,000 for Single, Head of Household, or Qualifying Widow(er)
The 0.9% tax applies to the earnings that surpass the applicable threshold.
This additional tax is paid only by the employee, as employers do not match this amount. Employers are required to begin withholding this tax from an employee’s pay once their wages exceed $200,000 in a calendar year, regardless of the employee’s filing status. Self-employed individuals are also responsible for paying this tax on their earnings above the thresholds.