Summary:
Once you become eligible for Medicare, the tax is automatically deducted from your paycheck on a monthly basis. Over each calendar year, you will see this as a tax on your earnings, including wages, tips, certain Railroad Retirement Tax Act (RRTA) benefits, and self-employment earnings that fall above a certain level. There is no minimum income limit, and all individuals who work in the United States must pay the Medicare tax on their earnings.
What is the Medicare tax?
The Medicare tax is a payroll tax that applies to all earned income in the United States and supports your health coverage when you become eligible for Medicare. Medicare taxes are used to help individuals with future Medicare costs and services once they become a Medicare beneficiary.
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Why do I pay Medicare tax?
Generally, all employees who work in the U.S. must pay the Medicare tax, regardless of the citizenship or residency status of the employee or employer. In certain limited situations, you may have to pay the Medicare tax on income earned outside of the United States (your employer should be able to confirm if this applies to you). If Medicare taxes are withheld from your paycheck in error, you should contact your employer to ask for a refund.
What are the Medicare tax rates?
The Medicare tax rate is determined by the IRS and is subject to change. The Federal Insurance Contributions Act, or FICA, tax rate for earned income is 7.65% in 2023, which consists of the Social Security tax (6.20%) and the Medicare tax (1.45%).
The Medicare tax is one of the federal taxes withheld from your paycheck if you’re an employee or that you are responsible for paying yourself if you are self-employed. If you are self-employed, you’ll pay a higher tax rate, since you’ll be responsible for paying both the employee portion and the share that is normally paid by your employer.
Visit IRS.gov or contact Social Security for the current self-employment tax rate by calling 1-800-772-1213 (TTY 1-800-325-0778), Monday through Friday, from 7AM to 7PM in all U.S. time zones.
What are the Medicare tax components?
Medicare is paid for through the two trust funds that are funded by different types of taxes. The two funds are Hospital Insurance (HI) Trust Fund and the Supplementary Medical Insurance (SMI) Trust Fund. And in other words, these two funds help pay for Medicare Part A or Medicare Part B and Part D. Let’s take a closer look at each of these components:
1. Hospital Insurance (HI) Trust Fund (Medicare Part A): The Hospital Insurance Trust Fund is funded by a payroll tax that is automatically deducted from the wages of most working individuals. It is also known as the Medicare Part A tax. Both employees and employers contribute to this tax, with each paying a specific percentage of the employee’s wages.
- For employees: The current tax rate for employees is 1.45% of their wages. This means that 1.45% of the employee’s earnings is withheld from their paycheck to fund Medicare Part A.
- For employers: Employers are also required to pay a matching 1.45% of their employees’ wages in Medicare Part A tax.
In addition to the payroll tax, individuals who are self-employed must pay both the employer and employee portions of the Medicare Part A tax, which is currently 2.9% of their net self-employment income.
2. Supplemental Medicare Insurance (SMI) Trust Fund (Medicare Part B and Medicare Part D): The Supplemental Medicare Insurance (SMI) Trust Fund sponsors both Medicare Part B, which covers medical services like doctor visits and outpatient care, and Medicare Part D, which provides prescription drug coverage. Unlike the Hospital Insurance Trust Fund, the SMI Trust Fund is funded partly by the government and premiums. The costs of these premiums varies and applies to certain individuals based on their income.
- For high-income earners: Individuals with higher incomes may be subject to an additional Medicare tax known as the Additional Medicare Tax. This tax is 0.9% and applies to earned income that exceeds certain income thresholds. For single filers, the threshold is $200,000, and for married couples filing jointly, it is $250,000.
- For investment income: High-income earners with net investment income above specific thresholds may also be subject to the Net Investment Income Tax (NIIT). The NIIT is 3.8% and helps fund Medicare Part B and Medicare Part D.
It’s important to note that the Medicare tax components help fund different parts of the Medicare program, providing financial support for essential healthcare services and prescription drug coverage for eligible individuals.
What is the Additional Medicare Tax?
The Affordable Care Act expanded the Medicare payroll tax to include the Additional Medicare Tax. This new Medicare tax increase requires higher wage earners to pay an additional tax (0.9%) on earned income.
All types of wages currently subject to the Medicare tax may also be subject to the Additional Medicare Tax. An individual owes Additional Medicare Tax on all cumulative wages, compensation, and self-employment income once the total amount exceeds the threshold for their filing status.
Who pays the Additional Medicare Tax?
Individuals are required to pay the Additional Medicare Tax if their individual wages, compensation, and self-employment income (combined income if married and filing a joint return) exceed certain wage base limits.
What are the wage base limits for the Additional Medicare Tax?
Here are the wage base limits for the Additional Medicare Tax as of 2023:
| Filing Status | Maximum Amount |
|---|---|
| Married (filing jointly) | $250,000 |
| Married (filing separately) | $125,000 |
| Single, head of household, or qualifying widow(er) with dependent child | $200,000 |
Example of how the Additional Medicare Tax works
Single individuals can have a maximum income of $200,000 before they are subject to the Additional Medicare Tax. Should the cumulative income exceed that amount, they will then be required to pay the Additional Medicare Tax amount (0.9%).
All wages currently subject to the Medicare Tax are also subject to the Additional Medicare Tax. An individual owes Additional Medicare Tax on all cumulative wages, compensation, and self-employment income that exceeds the threshold for their filing status.
Can you Opt Out of Medicare Tax?
While regular taxpayers may not opt out, there are certain religious groups which may qualify and be exempt from paying Social Security taxes. The qualifications for this are:
- Waive rights to all Social Security benefits including hospital care
- Be a member of a recognized religious sect that opposes accepting benefits under a plan that makes payments in the event of death or disability and makes payments for medical costs
- Member of a religious sect that makes a reasonable provision of food, shelter, medical care for its dependents since December 31, 1950
- Never received or entitled to payable Social Security benefits
Those members who would like to apply for Social Security exemptions can do so with a FORM 4029 and file the request with the Social Security Administration. From there, the IRS will notify you if you have qualified.
Medicare tax frequently asked questions
Are Medicare premiums tax deductible?
You might be able to deduct certain Medicare premiums in some limited situations. Ask a tax specialist to see if you qualify.
What is Medicare tax used for?
In summary, the Medicare tax is used to help people pay for and save for future Medicare costs. At times it can work to help not only the current beneficiary, but other beneficiaries involved in the Medicare system as well.
What is the Medicare Trust Fund?
Medicare trust funds are the funds that provides financing to Medicare beneficiaries, and is primarily made up of the following two funds:
- Hospital Insurance Trust Fund (HI): This is the fund that finances Medicare Part A, and covers hospital stays, skilled nursing facilities and hospice care for those eligible. The funds primary sources of revenue come from payroll taxes and the taxation of Social Security benefits. Additionally, transfers from this fund and the Railroad Retirement account add to the annual revenue.
- Supplemental Medical Insurance Trust Fund (SMI): This is the fund that finances Medicare Part B, which is the coverage of physician services, necessary medical supplies, and some of the newer Medicare Part D Prescription Drug plans. For this fund, the primary source of revenue comes from beneficiary monthly premiums, and does not require a large number of reserves.
This article is for general information and may not be updated after publication. Consult your own tax, accounting, or legal advisor instead of relying on this article as tax, accounting, or legal advice.
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