Generally, all employees who work in the U.S. must pay the Medicare tax.1 But why?

Here are some answers to help explain Medicare tax.

What is Medicare tax?

Medicare tax is a payroll tax. It’s 1 of 2 payroll taxes (Social Security) included in the Federal Insurance Contributions Act, or FICA. Medicare tax is collected from current wage earners and their employers to pay for hospital and medical care costs of current Medicare recipients.2

Who pays Medicare tax?

Medicare taxes are paid by both employee and employer. The employee pays half the tax and the employer pays the other half. The current rate for Medicare tax in 2021 is 2.9% of all earned income. This means employees pay a 1.45% tax on the first $200,000 of their wages and employers pay the other 1.45%.3

If you’re self-employed, you’re responsible for the entire 2.9% Medicare tax.4

What is the Additional Medicare Tax?

The Additional Medicare Tax is an extra 0.9% tax on top of the standard 1.45% tax payment for Medicare. It applies to people who make more than a certain amount of money per year. In 2021, you pay the Additional Medicare Tax if your wages exceed these amounts:5

  • Single or Head of Household or Qualifying Widow(er) – $200,000
  • Married Filing Jointly – $250,000
  • Married Filing Separately – $125,000

Note: The Additional Medicare Tax was part of the Affordable Care Act (ACA) and has been in place since January 2013.6

Is Medicare fully funded by Medicare tax?

No. Funding for Medicare comes from the Medicare Trust Funds, which are 2 separate accounts held by the U.S. Treasury:7

  • The Hospital Insurance (HI) Trust Fund, which pays for Medicare Part A benefits, is funded mainly through payroll taxes on earnings and income taxes on Social Security benefits.
  • The Supplementary Medical Insurance (SMI) Trust Fund, which pays for Medicare Part B benefits, is funded by general tax revenue and premiums paid by enrollees.

Get more answers about Medicare

For more helpful information on Medicare, check out these 10 frequently asked questions about Medicare plans.

Sources

  1. “Social Security Tax / Medicare Tax and Self-Employment,” IRS.gov, last accessed April 14, 2021, https://www.irs.gov/individuals/international-taxpayers/social-security-tax-medicare-tax-and-self-employment, opens new window.
  2. “How FICA Tax and Tax Withholding Work in 2021,” NerdWallet, last accessed April 14, 2021, https://www.nerdwallet.com/article/taxes/fica-tax-withholding, opens new window.
  3. How FICA Tax and Tax Withholding Work in 2021.”
  4. How FICA Tax and Tax Withholding Work in 2021.”
  5. “Questions and Answers for the Additional Medicare Tax,” IRS.gov, last accessed April 14, 2021, https://www.irs.gov/businesses/small-businesses-self-employed/questions-and-answers-for-the-additional-medicare-tax, opens new window.
  6. “Questions and Answers for the Additional Medicare Tax.”
  7. “How is Medicare funded,” Medicare.gov, last accessed April 15, 2021, https://www.medicare.gov/about-us/how-is-medicare-funded, opens new window.

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