What is the Medicare tax?
The Medicare tax is a tax that you pay based on the wages you earn. It helps fund the Medicare program, a low-cost health insurance option for people 65 or older as well as some younger people with certain disabilities.
If you have an employer, your employer automatically withholds the Medicare tax from your paycheck. If not, you pay the tax yourself.
The Medicare tax makes up one part of the Federal Insurance Contributions Act (FICA). Employers are required by law to collect both Medicare and Social Security tax and submit the money to the Internal Revenue Service (IRS) on a quarterly basis. That money is then placed into a government trust fund to be used to help cover the medical expenses of the Medicare population.
The total FICA taxes for an employee is 7.65% of your gross earnings for that pay period. Of the 7.65%, 1.45% goes towards the Medicare contribution. The remaining 6.2% goes towards the Social Security program.
Employers must match the Medicare and Social Security contributions of their employees. Together, these percentages add up to 15.3%, half of which is paid by the employee (if you’re not self-employed).
As you get older and eventually retire, you may have a fixed income. Medicare offers a relatively low-cost way to get medical coverage. During your working life, you’ll pay into this system so that by the time you’re ready to draw benefits, there will be funding available. There is a cost for Medicare, but it’s not nearly as high as private insurance for the under-65 population. That’s partly thanks to the taxes that everyone pays in.
If I’m self-employed, how much do I have to pay in Medicare taxes?
We mentioned that the tax rates above apply to people who have an employer. If you’re self-employed, you’ll have a bigger individual tax burden because all employed people pay the same FICA rates. But if you’re working for yourself, you have to cover the full amount instead of half.
This means that if you’re self-employed, you’ll pay the full 15.3% FICA tax yourself when you file your taxes. That breaks down to 2.9% for Medicare and 12.4% for Social Security.
Now, there may be special deductions available to you as a self-employed worker that could help offset this higher tax rate. If you have specific questions about the Medicare tax and how it applies to you, check with an accountant.
When am I eligible to begin receiving Medicare?
You’re eligible for Medicare at age 65 unless you qualify based on disability. Your initial enrollment window for Medicare starts three months before the month you turn 65 and runs for three months after that month, for a total of 7 months.
If you qualify for Medicare based on disability instead of age, then enrollment may differ for you. Contact Medicare or Social Security for specifics about enrollment.
Are healthcare deductions exempt from the Medicare tax?
The Medicare tax only applies to covered wages. Payments made for health insurance premiums are usually exempt from income, Social Security and Medicare taxes.
How do I handle overpayments or underpayments for the Medicare tax?
Employers have to withhold the appropriate taxes from your wages. It’s the law. If you think your employer isn’t doing this or you have concerns, contact the IRS directly at 800-829-1040.
Ultimately, though, income tax is your responsibility. Even if your employer isn’t doing what they should, the IRS still expects you to cover your portion of the FICA taxes.
If you don’t pay the FICA taxes or have them withheld from your paycheck, then you may not be eligible for Medicare, Social Security or unemployment benefits.
What is the Medicare tax rate?
The Medicare tax rate is 1.45% for the employer and 1.45% for the employee, for a total of 2.9%. If you’re self-employed, you’ll pay the full rate yourself.
This amount is withheld from your wages (if you have an employer) or you’ll pay it when you file your return (if you’re self-employed).
If an employee is exempt from paying Social Security and Medicare taxes, are they responsible for telling their employer?
Your employer should determine if you need to pay FICA taxes. But if you already know that you’re exempt, then it may be a good idea to bring it up with your employer. That way, they can get the appropriate paperwork (if necessary) to prove exemption status.
Just know that most people pay FICA taxes. There are exemptions for certain people, such as students working at their college or some city employees, but these are not common. Almost everyone pays into the system.
If I’m exempt from FICA but my employer withholds the taxes anyway, am I eligible for a government refund?
This is a complex situation. If you’re dealing with this specific scenario, we highly recommend contacting an accountant or a tax attorney who specializes in this area of tax law.
Generally speaking, though, you’ll need to take this issue up with your employer or, possibly, report the employer to the IRS for improper tax withholding depending on the nature of the error. It may be a simple matter of correcting your tax form, or there could be more involved.
Contact the IRS or an accountant for more information.
What percentage of a person’s income is withheld from their paycheck for Medicare and Social Security taxes?
Employers withhold a total of 7.65% of an employee’s pre-tax wages for Medicare and Social Security. Of that amount, 6.2% goes to Social Security and the remaining 1.45% goes to Medicare.
Employers also match these percentages, meaning they’ll pay 7.65% themselves, bringing the total FICA amount to 15.3% for the year.
There’s no earnings cap on Medicare contributions, but there is for Social Security. In 2023, the wage limit is $160,200. That’s the maximum wage you’ll owe Social Security taxes on. Medicare doesn’t have a cap, so you’ll owe the Medicare tax on your wages regardless of what they are.
If you’re self-employed, you’ll pay the full FICA amount of 15.3% yourself.
Can I deduct Medicare taxes from my tax return?
No, you can’t deduct the Medicare tax from your income tax return.
Once you have Medicare, you may be able to deduct Medicare premiums from your return if you itemize your return and/or you’re self-employed. But the Medicare tax is different and can’t be deducted.
What does the Medicare tax pay for?
Medicare tax payments go into a trust fund that’s managed by the federal government. It’s called the Hospital Insurance Trust Fund, and it helps pay for Medicare Part A. That includes the costs for Part A services, like hospital stays and skilled nursing facility care, as well as administrative costs for the Medicare program itself.
Most people do not pay a monthly premium for Medicare Part A because they pay into the system during their working lives. If you reach Medicare eligibility age (65) and have 40 work credits — determined by Social Security — then you get Part A for free. If not, you’ll have a monthly premium that varies each year.
If you’re concerned about your work credits or want to make sure you’re on the right track for premium-free Part A, check with Social Security.
Note: you may not have a premium for Medicare Part A, but everyone has cost sharing. That means you will have a deductible and other out-of-pocket costs when you get care. The trust fund is not large enough to cover 100% of the cost of medical care for the Medicare population.
What is the Additional Medicare Tax?
The Additional Medicare Tax is a surcharge for people whose income exceeds a certain threshold. In other words, if you make above a set amount of money each year, you’ll pay an extra tax on top of the standard Medicare tax.
What is the Additional Medicare Tax rate?
The current rate for the Additional Medicare Tax is 0.9%.
When am I liable for paying the Additional Medicare Tax?
You’re liable for paying the Additional Medicare Tax if your wages, self-employment income or other compensation exceeds the following thresholds, based on your tax filing status:
- Single: $200,000
- Married filing jointly: $250,000
- Married filing separately: $125,000
- Head of household (with qualifying person): $200,000
- Widow(er) with dependent child: $200,000
Once your income exceeds the threshold that applies to your situation, you’ll be liable for the Additional Medicare Tax.
Is Additional Medicare Tax withheld from an employee’s wages?
Yes. Your employer will start withholding the Additional Medicare Tax once your income (wages and other compensation) exceeds $200,000 for the year — regardless of your tax filing status or any other work you do outside of your job. That’s your employer’s responsibility.
But because you might have other compensation or wages, such as from a side job, you may owe more than what your employer withholds. In that case, you can update your W-4 to have your employer withhold more taxes, or talk to an accountant about the best course of action.
Also, the Additional Medicare Tax will only be withheld on the amount that exceeds the threshold. So, for example, if you earn $215,000 for the year, the tax is applied on the $15,000, not the full amount of your compensation.
Can I request additional withholding specifically to cover Additional Medicare Tax?
In the last section, we mentioned updating your W-4 to withhold more taxes. We need to clarify that you cannot have your employer withhold more money just to cover the Additional Medicare Tax.
But what you can do is have your employer withhold more income tax. You can then use the excess to offset anything you might owe to the IRS when you file your return for the year.
This is a complex situation, though, so we recommend talking to an accountant who can answer specific questions about your individual tax scenario.
Is there anything else I should know about Medicare and taxes?
We’ve covered the basics here. But if you have specific questions about Medicare and how it applies to your tax situation, contact the IRS directly (800-829-1040) or talk to an accountant.