Medicare Tax

Medicare tax is a federal payroll tax that helps pay for the Medicare program.

The Medicare tax is generally withheld from your paycheck as part of your FICA taxes — what are usually called “payroll taxes.” FICA stands for Federal Insurance Contributions Act. FICA taxes include money taken out to pay for older Americans’ Social Security and Medicare benefits.

If you are self-employed, your Medicare taxes are included in your self-employment tax.

Medicare tax pays for Medicare Part A hospital insurance, which covers hospital inpatient care, skilled nursing facility care, hospice care and certain types of home health care for people on Medicare.

The Medicare tax rate is 2.9% of your income. If you work for an employer, you pay half of it, and your employer pays the other half — 1.45% of your wages each.

If you are self-employed, you are responsible for the full 2.9%.

Your total FICA tax rate equals 15.3% of your wages — with the other 12.4% of your salary going to Social Security. Your employer also pays half of the Social Security taxes.

People with higher incomes may also have to pay an additional Medicare tax of 0.9% to help pay for the Affordable Care Act.

The Affordable Care Act added an extra Medicare surtax for people with higher incomes starting in January 2013.

Named the Additional Medicare Tax, it adds an additional 0.9 percent tax on top of the 1.45 percent employees have to pay. Employers are not required to match the amount and the employee is responsible for the entire amount of the extra tax.

Whether you have to pay the Additional Medicare Tax depends on your annual income and your tax filing status.

You only owe the additional 0.9% Medicare tax on the money you earn over and above $200,000.

Let’s say you have a single tax filing status. You don’t pay the additional 0.9% tax on the first $200,000 you earn in a year. You will pay the standard 1.45%, and your employer will pay a matching 1.45%.

But if you earn more than $200,000 a year, your employer will withhold a 0.9% additional Medicare tax. So your total Medicare tax will equal 2.35% of your salary on everything you earn over $200,000.

The tax is not withheld until you cross the $200,000 threshold. The additional tax will then be withheld until the end of the calendar year. Your employer does not match this additional tax.

There is a wage base limit on the Social Security tax you pay but not on the Medicare tax. For 2022, you don’t have to pay Social Security taxes on income over $147,000.

But you will still have to pay the same base Medicare tax rate regardless of how much you earn.

Almost every employee in the United States — whether they work for an American or foreign employer — pays Medicare taxes. All employers in the U.S. must also match the amount of Medicare taxes their employees pay — with certain limitations on additional Medicare taxes for high earners.

Self-employed workers also have to pay Medicare taxes.

Foreign residents working in the United States on certain types of work visas or student visas are also exempt from having to pay Medicare taxes.

The United States has agreements with foreign countries to make sure that people from one country working in the other are subject to taxes only for one country or the other. These are called totalization agreements.

The Medicare tax helps fund the Hospital Insurance (HI) Trust Fund. It’s one of two trust funds that pay for Medicare.

The HI Trust Fund pays for Medicare Part A benefits, including inpatient hospital care, skilled nursing facility care, home health care and hospice care. It also pays for administering the Medicare program.

A second Supplementary Medical Insurance Trust Fund receives money from Congress and interest earned on trust fund investments. It pays for Medicare Part B benefits and Part D prescription drug coverage.

Both of these trust funds also pay for administrating the Medicare program and covering the costs of fighting Medicare fraud and abuse.

If you are self-employed, you are responsible for the entire 2.9 percent share of your earned income for the Medicare tax. This is covered through a self-employment (SE) tax. The self-employment tax covers your entire 15.3 percent of FICA taxes, paying your share of Social Security and Medicare taxes.

However, you may get a break.

You determine your SE tax using IRS Schedule SE on either Form 1040 or 1040-SR. You may then deduct the employer-equivalent amount of your self-employed tax — half of the total amount — from your gross income.