Your Medicare wages are the portion of your earnings that you will have to pay Medicare taxes on. Most Americans’ wages are subjected to this tax. Paying Medicare taxes for 40 quarters or more, equivalent to 10 years, gives you access to premium-free Medicare Part A once you are eligible for enrollment.
What Are Medicare Wages?
Medicare is similar to many other government programs in that the program is funded through taxpayer dollars. According to the U.S. Centers for Medicare & Medicaid Services, the total amount spent on Medicare reached nearly $830 billion in 2020. The trade-off for you having access to affordable Medicare coverage in retirement is that you must make regular contributions to the program throughout your income-earning years.
The Medicare tax is deducted from your paychecks through a payroll tax known as FICA, or the Federal Insurance Contributions Act. This tax, which virtually all working Americans must pay, supports the funding of both the Medicare and Social Security programs. In addition to the portion of the Medicare tax you pay, your employer pays a matching tax on your Medicare wages.
Medicare Wages vs. Gross Wages
Your Medicare wages differ from your gross wages. Before Medicare taxes are applied to your wages, certain things are subtracted from your gross wages, such as your payments to medical insurance and life insurance plans. The amount left over after subtracting those costs is known as your Medicare wages, and your Medicare wages are the amount you will pay Medicare taxes on.
Your gross wages are typically the total amount of income you have earned before anything else is subtracted.
What Is the Medicare Tax Rate?
According to rates set by the Internal Revenue Service, the current Medicare tax rate is 1.45%. This tax is paid by both you and your employer, who contributes a matching 1.45%.
There is no cap on the amount of your Medicare wages that are subject to the Medicare tax. However, if your Medicare wages are above $200,000 in a year, then you will owe an additional 0.9% Medicare tax on the excess wages. This tax is a relatively new addition, going into effect in 2013 to help fund the Affordable Care Act.
For married couples who file jointly, wages above $250,000 will be subject to the additional tax. If you are married but filing separately, the additional tax kicks in only if your combined Medicare wages exceed $125,000.
If you are self-employed, you must pay a 2.9% Medicare tax on your Medicare wages instead of the typical 1.45%. This is because you are essentially paying both parts of the tax: the amount you owe (1.45%) and the matched amount an employer would pay (1.45%).
All income earners must also pay Social Security taxes on top of your Medicare taxes. The current Social Security tax rate is 6.2%, and this amount, just like the Medicare tax, must be matched by your employer.
Medicare Tax Exemptions
Typically, everyone who works and receives an earned income must pay Medicare taxes. There are no exemptions to this tax for self-employed workers or other special scenarios.
But there are some exemptions that apply to what is considered part of your Medicare wages. Any contributions you make toward your retirement, such as contributions to a 401(k) account or other pre-tax deductions, are not factored into your Medicare wages and, therefore, won’t be considered part of your earnings that are taxed by Medicare.
Exemptions to FICA taxes do exist for students. If a student is being paid by the school and is also studying at the school, their earnings will not be taxed, either by Medicare or by Social Security.
3 Cited Research Articles
- Internal Revenue Service. (2022, March 15). Topic No. 751 Social Security and Medicare Withholding Rates. Retrieved from https://www.irs.gov/taxtopics/tc751
- Internal Revenue Service. (2022, January 21). Student Exception to FICA Tax. Retrieved from https://www.irs.gov/charities-non-profits/student-exception-to-fica-tax
- U.S. Centers for Medicare & Medicaid Services. (2021, December 15). NHE Fact Sheet. Retrieved from https://www.cms.gov/Research-Statistics-Data-and-Systems/Statistics-Trends-and-Reports/NationalHealthExpendData/NHE-Fact-Sheet