Medicare

What Is Medicare Tax? Definitions, Rates and Calculations

What Is Medicare Tax? Definitions, Rates and Calculations

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Medicare tax is deducted automatically from your paycheck to pay for Medicare Part A, which provides hospital insurance to seniors and people with disabilities. The total tax amount is split between employers and employees, each paying 1.45% of the employee's income. High-income earners pay a slightly higher percentage and those who are self-employed pay the tax with their quarterly filings.

What does Medicare tax mean?

Medicare tax is a federal payroll tax that pays for a portion of Medicare.

Because of the $284 billion paid in Medicare taxes each year, about 63 million seniors and people with disabilities have access to hospital care, skilled nursing and hospice.

Generally, all U.S.-based workers must pay Medicare tax on their wages. The tax is grouped together under the Federal Insurance Contributions Act (FICA). When looking at your paycheck, you may see the Medicare tax combined with the Social Security tax as a single deduction for FICA.

The Medicare tax was established in 1966 to solve a health care problem: For many seniors, income declines and health care needs increase after retirement. But before Medicare, the cost of insurance got too high to manage, and some retirees' policies were canceled due to their age.

The Medicare program has many components, but a key change at the time was the working population would pay a new Medicare tax to support Medicare hospital insurance.

How does it work?

Medicare tax is a two-part tax where you pay a portion as an automatic deduction from your paycheck, and your employer pays the other part. The tax is based on "Medicare taxable wages," a calculation that uses your gross pay and subtracts pretax health care deductions such as medical insurance, dental, vision or health savings accounts.

Your employer is required to collect the tax, and it sends both the employee and employer version to the IRS through regular electronic deposits.

For example, an individual with an annual salary of $50,000 would have a 1.45% Medicare tax deducted from their paycheck. That's about $60 each month. The employer would pay an additional $60 each month on their behalf, totaling $120 contributed to Medicare.

Those who are self-employed pay a Medicare tax as a part of the self-employment tax. Rather than being deducted from a paycheck, the money is paid through quarterly estimated tax payments.

The Medicare tax rate has remained unchanged since 1986. But in 2013, an Additional Medicare Tax for high-income earners was implemented as part of the Affordable Care Act.

What is the Medicare tax used for?

The Medicare tax pays for Medicare Part A, providing health insurance for those age 65 and older and people with disabilities or certain medical issues. Medicare Part A, also known as hospital insurance, covers health care costs such as inpatient hospital stays, skilled nursing care, hospice and some home health services.

The tax collected for Medicare accounts for 88% of the total revenue for Medicare Part A.

Medicare Tax revenue

Total revenue for Medicare Part A

  • Medicare payroll tax: 88% ($284 billion)
  • Other funding from taxes, premiums, transfers and interest: 12% ($39 billion)

All revenue for Medicare Part A goes into the Hospital Insurance (HI) trust fund, which is slowly being depleted because the expenses for associated health services have generally been higher than the fund's annual revenue. In 2021, the Congressional Budget Office (CBO) projected the trust fund will be fully depleted by 2026.

What is the Additional Medicare Tax used for?

Even though it has Medicare in the name, the Additional Medicare Tax paid by high-income earners is used to offset the costs of the Affordable Care Act (ACA), according to the IRS. Funds are used for the provisions of the ACA, including providing health insurance tax credits, to make health insurance more affordable for more than 9 million people.

What's the current Medicare tax rate?

Medicare tax rate

In 2022, the Medicare tax rate is 1.45%. This is the amount you'll see come out of your paycheck, and it's matched with an additional 1.45% contribution from your employer for a total of 2.9% contributed on your behalf.

2022 Medicare tax rate
You pay1.45%
Your employer pays1.45%

If you're a high-income earner, you'll pay an Additional Medicare Tax withholding of 0.9% on any wages that exceed the annual earnings threshold. In 2022, this threshold is $200,000 for individuals and $250,000 for those who file jointly.

2022 Additional Medicare Tax for high-income earners
Base rate you pay1.45%
Additional amount you pay on income above the annual threshold0.9%
Your employer pays1.45%

For those who are self-employed, the full 2.9% must be paid by the individual, rather than splitting the tax with an employer. This tax toward Medicare is included in the self-employment tax that is paid quarterly through estimated tax payments.

The self-employment tax amount is based on net earnings calculated using IRS form Schedule SE. Even though the tax rate is higher for the self-employed, it's being paid on a smaller portion of income because the taxable income is 92.35% of net earnings.

For high-income self-employed earners, the Additional Medicare Tax of 0.9% also applies for any income above the annual threshold.

2022 Medicare tax for self-employed
Rate you pay on 92% of net earnings2.9%
Additional amount you pay on income above the annual threshold0.9%

What wages are subject to the Medicare tax?

All taxable employment earnings are subject to Medicare tax. This includes multiple types of income such as salary, overtime, paid time off, tips and bonuses. There is no cap on the amount that's taxed — you may pay Medicare tax on all taxable income. This differs from the Social Security tax, which you pay only on the first $147,000 of your yearly earnings.

Some pretax deductions may be excluded from Medicare wages, but others are included. Pretax payments for medical insurance or contributions toward a health savings account are not included in the amount that's taxed. However, Medicare tax is charged on the funds you contribute to a retirement account and premiums paid for life insurance, even though these funds are excluded from your federal income taxes.

Are Medicare taxes charged on investment income?

Yes. If you received investment income last year, you'll be taxed 3.8% on either your net investment income or your adjusted gross income (AGI) above the annual maximum, , whichever is less.

Even though the name indicates proceeds go to Medicare, revenue from the Unearned Income Medicare Contribution goes into a general fund and is not earmarked for Medicare.

Frequently asked questions

What type of tax is Medicare?

Medicare tax is a required employment tax that's automatically deducted from your paycheck. The taxes fund hospital insurance for seniors and people with disabilities.

What is the tax rate for Social Security and Medicare?

The FICA tax includes the Social Security tax rate at 6.2% and the Medicare tax at 1.45% for a total of 7.65% deducted from your paycheck.

What does it mean if you see a Medicare deduction on your paycheck?

If you see a Medicare deduction on your paycheck, it means that your employer is fulfilling its payroll responsibilities. This Medicare Hospital Insurance tax is a required payroll deduction and provides health care to seniors and people with disabilities.

What happens if your employer did not withhold Social Security and Medicare taxes?

Employers that do not adhere to tax laws by withholding FICA taxes for Social Security and Medicare could be subject to criminal and civil sanctions. If you see that no taxes have been withheld, check with your company to make sure there wasn't an error or that you didn't claim to be exempt on your W-4 form. If you underpaid, you may have to pay a tax penalty at the end of the year.

How do self-employed people pay Medicare tax?

If you are a self-employed person, Medicare tax is not withheld from your paycheck. You would typically file estimated taxes quarterly and use the estimated tax payments to pay your self-employment tax including Social Security and Medicare taxes.

What is a Medicare benefit tax statement?

This evidence of coverage statement confirms that you have enrolled in Medicare Part A and have health insurance that meets the Affordable Care Act requirements. Also called a 1095-B, this statement can be used if the IRS asks you to verify your health insurance coverage.

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