For the government to provide Medicare to 67.4 million people per month, it has to get the money from somewhere.
That funding, totaling $1 trillion in 2023, comes from a combination of government contributions, payroll taxes, and monthly premiums paid by Medicare beneficiaries. Each part of Medicare is financed through different methods, and the funds allocated to one part of the program cannot be used to cover expenses for another part.
The term Medicare tax, also known as the hospital insurance tax, refers to the 2.9% tax on earnings and income by current U.S. workers and is the primary funding source for Medicare Part A (hospital insurance). In 2023, roughly $368 million was contributed to Medicare from this Medicare tax.
“Employees, employers, and the self-employed contribute to the Medicare tax, to support our Medicare program for senior and disabled Americans,” says Ge Bai, PhD, CPA, professor of accounting at Johns Hopkins Carey Business School.
Employer and employee contributions to the Medicare tax
Employers are required to withhold Medicare tax from their employees.
“The employer and employee each contribute 1.45% of gross earnings to total the 2.9% Medicare tax withholding,” says Bai.
Here is an example, says Bai: An employee has $5,000 in earnings for each pay period. In addition to income and Social Security taxes, the employee portion of Medicare tax, which is 1.45% of that $5,000, or $72.50, will be taken out of that payroll. The same amount ($72.50) will be taken out of the employer’s revenues. The total ($145) will be sent by the employer to the IRS.
Self-employed contributions to the Medicare tax
Business owners, contractors, and freelancers are considered self-employed.
In addition to annual income tax returns, self-employed individuals generally pay estimated taxes quarterly.
“Those taxes include the self-employment tax, which is 15.3%,” says Paul Miller, CPA, founder at Miller and Company. That rate includes 12.4% for the Social Security tax and 2.9% for the Medicare tax.
Miller offers this example: A business owner estimates their quarterly salary and net earnings as $20,000. In addition to income and Social Security taxes, the Medicare tax, or 2.9% of that $20,000, or $580, will need to be sent to the IRS.
Additional Medicare tax for high earners
In 2013, the Additional Medicare Tax came into effect. It added an additional 0.9% in Medicare taxes for employee earnings and self-employed income above a certain threshold.
For employees, that threshold is $200,000 in 2024.
That means that for every dollar in earnings over $200,000, the Medicare tax withheld will be 3.8%, which is 2.9% plus 0.9%, says Bai.
For the self-employed, thresholds vary based on tax filing status, says Miller. The additional 0.9% tax kicks in if self-employed income, wages, and compensation (along with your spouse's if filing a joint return) are over the threshold for your filing status:
- Married filing jointly: $250,000
- Married filing separate: $125,000
- Single: $200,000
- Head of household (with qualifying person): $200,000
- Qualifying surviving spouse with dependent child: $200,000
Medicare tax payments for beneficiaries
The Medicare tax applies even if you are on Medicare and are still working. If you have wages or earnings from work, they are subject to the same Medicare tax rules, says Bai.
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