Medicare Tax: Definition, Rate And Facts

Have you noticed the automatic Medicare tax withholding on your paystub and wondered where that money is going? Thankfully, that money doesn’t just disappear, it helps to pay for health care services for senior citizens and people with disabilities. Let’s dive into the details about how the Medicare tax works and how much you may pay in 2024.

Medicare Tax At A Glance

• Purpose: the Medicare tax funds the government health insurance program for senior citizens known as Medicare.
• Who pays: employees, employers and people who are self-employed all pay a Medicare tax.
• Rate for tax years 2023 and 2024: The Medicare tax rate for 2023 and 2024 is 1.45% for employers and employees and 2.9% for self-employed people.
• Surcharges for high earners: Employers are required to withhold an additional 0.9% Medicare tax from employees on wages over $200,000 in a calendar year.

What Is Medicare Tax?

Medicare tax is a payroll tax automatically taken from employee’s paychecks based on their gross income. Employers pay the same tax rate on their payroll as well.

This money funds the government-backed health insurance plans for citizens aged 65 and older as well as certain individuals living with disabilities, helping pay for their doctors appointments, medicine, medical procedures and anything else covered by their Medicare health insurance plan.

How Medicare Taxes Work

Medicare taxes are paid differently depending on the nature of employment.

How Employers Withhold Medicare Taxes

Employers automatically withhold Medicare taxes from your paycheck as a payroll tax. That means instead of paying the tax once when you file your taxes, it is held by your employer every pay period. So you will never actually see the money in your bank account. Your employer then pays your half and their own half of the Medicare tax to the federal government.

All of your earned income is subject to Medicare taxes. This includes hourly wages, salaries, tips, bonuses and any other taxable income.

How Self-Employed Workers Handle Medicare Taxes

Self-employed individuals are essentially the employee and employer, so they pay the full 2.9% Medicare tax on their gross earnings. They pay this through the self-employment tax, which is essentially a combination of the Social Security and Medicare taxes that are withheld from employee paychecks.

What Medicare Taxes Fund

Medicare taxes, mandated by the Federal Insurance Contributions Act (FICA) along with Social Security taxes, fund essential medical services for senior citizens and people with disabilities that they may not otherwise afford. More specifically, the money goes toward several health care plans that eligible citizens can choose from.

Medicare Part A, also known as Hospital Insurance, covers the essential services a participant may need in multiple hospital facilities. This includes inpatient care at a traditional hospital, but also skilled nursing facilities and hospice facilities. It also covers some home health care services like physical therapy. 

Medicare Part B, also known as Medical Insurance, covers outpatient services needed to treat medical conditions or preventative service to stop illnesses before they strike. It also covers a limited amount of prescription drugs. Medicare Part D, also known as Drug coverage, covers a much wider range of prescription drugs.

Medicare Tax Rate For 2023 And 2024 Tax Years

The Medicare tax rate for both 2023 and 2024 is 1.45%. This is the percentage that both employers and employees will pay. Self-employed workers must pay both halves of this tax, so their tax rate is 2.9%. You can find more details on Medicare withholding rates on the IRS website.

What To Know About Additional Medicare Taxes

The Affordable Care Act, passed in 2010, added another level to Medicare taxes for especially high-income earners.

Additional Medicare Taxes Based On Income

The Additional Medicare Tax is an extra 0.9% tax levied on taxpayers with wages that exceed $200,000 as single filers or $250,000 as joint filers. While the employee must pay this additional Medicare tax, the employer does not have to match it.

Additional Medicare Taxes Based On Investments

High earners may also have to pay a tax based on their investments thanks to the Net Investment Income Tax (NIIT). This is a 3.8% tax based on your modified adjusted gross income (MAGI). The NIIT takes into account not only your earned income but also investment income such as dividends, capital gains, rental income, taxable interest and royalty income. The NIIT is reserved for the same level of earners as the Additional Medicare Tax: $200,000 for single filers and $250,000 for joint filers.

Medicare Tax FAQs

Below are some of the most common questions about Medicare taxes.

Why do I pay Medicare tax?

All wage-earning citizens pay the Medicare tax so vulnerable communities like people over 65 or people with disabilities can afford quality medical care. Since senior citizens or people with disabilities may not be able to work to pay for their own medical expenses, this government-backed insurance program can help provide essential medical services for them.

Why am I paying Additional Medicare Tax?

You are paying the Additional Medicare Tax because you make over $200,000 in a calendar year if you are a single filer. If you are a joint filer paying the Additional Medicare Tax, then you are paying because you make over $250,000 as a couple.

Are Medicare premiums tax-deductible?

Yes! You can deduct your Medicare premiums and other medical expenses if they add up to more than 7.5% of your adjusted gross income (AGI).

The Bottom Line On Medicare Tax

Medicare tax is paid by all employers and employees alike so citizens over 65 and people with disabilities can afford quality health care. Most employees will pay just 1.45% of their gross income to fund the government-backed health insurance and medical program that provides critical services to communities in need.

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