Here’s the skinny on how those taxes are computed and what benefits they buy.
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Medicare, the federal health insurance program mandated primarily for people 65 and older, provides millions of people in the United States with access to healthcare services. While many are familiar with Medicare coverage, understanding Medicare taxes, which involves everything from mandatory payroll deductions to additional taxes for high earners, is equally important for everyone, including those who are self-employed.
Here are five things every taxpayer should know about Medicare taxes, including what it is, who pays, and current rates.
1. What is the Medicare Tax?
Medicare tax is a federal employment tax that funds a portion of the Medicare insurance program. Medicare is a U.S. federal health insurance program designed for people age 65 or older, and some people under age 65 with specific disabilities. Medicare has different parts: A, B, C, and D. Medicare Part A helps pay for inpatient hospital stays, skilled nursing facilities, hospice care, and home health care services. Unlike Medicare Part B (medical insurance) and Part D (prescription drug coverage), which are partially funded through premiums and general revenue, payroll taxes primarily finance Medicare Part A. Medicare taxes are part of the Federal Insurance Contributions Act (FICA) and are automatically deducted from employees’ paychecks to fund Medicare and Social Security programs.
2. Who Has to Pay Medicare Taxes?
Employed U.S. workers, including non-citizens, are required to pay Medicare taxes. These deductions from your paycheck are mandatory. The employer and the employee each contribute to Medicare taxes. Self-employed individuals must also pay Medicare taxes, covering both the employee and employer portions.
3. The Basic Medicare Tax Rate
The Medicare tax rate is 2.9% of earned income and wages. As a W-2 employee, you pay half of that tax (1.45%), and your employer pays the other half, 1.45%. Unlike Social Security taxes, which have a wage base limit, Medicare taxes are not subject to an income cap, meaning all your earned income and wages are subject to Medicare tax.
4. Additional Medicare Tax for High-Earners
High-income earners may be subject to additional Medicare surtaxes, including the Additional Medicare Tax and Net Investment Income Tax (NIIT). The Additional Medicare Tax is 0.9% and applies to earned income exceeding certain thresholds: $200,000 for individuals and $250,000 for married couples filing jointly. Employers do not have to pay a matching 0.9% with the additional Medicare tax. The NIIT is a 3.8% tax on investment income such as capital gains, dividends, royalties, rent, and interest, based on your filing status and income.
5. Self-Employed Have to Pay Medicare Taxes
Self-employed individuals must pay the total 2.9% Medicare tax rate and any additional Medicare tax if they are high earners. The Self-Employed Contributions Act (SECA) requires self-employed people to pay taxes on their net earnings. The self-employment tax rate is 15.3% (12.4% for Social Security and 2.9% for Medicare). For 2024, the first $168,600 of self-employment income is subject to Social Security tax. Income tax deductions can help lower your tax burden, as you can deduct half of your Social Security tax on your federal return.
Summary
All taxpayers, including employees, self-employed individuals, and retirees, need to know how Medicare taxes work. This includes mandatory payroll deductions and additional taxes for high earners. Having a good grasp of Medicare taxes can help you make informed financial decisions and plan for healthcare expenses before and during retirement.
If you have questions about Medicare costs and benefits, reach out to Dan Griset, with a call or text at (714) 973-2100.