Medicare Taxes Explained
One of the most exciting parts about turning 65 is the opportunity to receive Medicare healthcare insurance that covers visits to your healthcare provider, but even if you are far from that age, you may have noticed that a portion of the payroll taxes being withheld from your income is funding the Medicare program.
TABLE OF CONTENTS
Key Takeaways:
- Medicare taxes fund hospital insurance for individuals in the U.S. who are over the age of 65 or have disabilities or certain illnesses.
- The tax rate for Medicare taxes is 2.9% of an individual’s gross earnings. Employees split the cost with their employers, each paying 1.45% of the employee’s gross income, whereas self-employed individuals must cover the full 2.9% themselves.
- There are three types of Medicare: Part A, Hospital Insurance, is covered by the Hospital Insurance Trust Fund which is funded by Medicare taxes. Part B, Medical Insurance, and Part D, Prescription Drug Coverage, are covered by the Supplemental Medical Insurance Trust Fund, which is funded with premiums paid by tax revenue, beneficiaries, and investment earnings.
- Taxpayers who earn above a certain earning threshold are subject to additional Medicare surtaxes.
What Are Medicare Taxes?
Medicare taxes represent a percentage of a U.S. worker’s gross wages that must be paid to fund the Medicare program. Also known as hospital insurance taxes, this federal employment tax is withheld from the gross income of almost all workers in the U.S. and used to fund Part A of the Medicare health insurance program.
What is Medicare?
Medicare is a federal health insurance policy offered to individuals in the U.S. when they reach the age of 65, as well as certain individuals with disabilities or medical conditions.
There are 3 main types of Medicare:
Medicare Part A - Hospital Insurance
Medicare Part A, Hospital Insurance, is probably the health insurance policy most people think of when they hear the term “Medicare.” Medicare Part A is paid for by the Hospital Insurance Trust Fund, which is funded by Medicare taxes. This form of health insurance covers in-patient hospital visits, nursing home care, hospice, and certain home healthcare.
Medicare Part B - Medical Insurance
Medicare Part B, Hospital Insurance, is different from Medicare Part A because, instead of covering hospital visits, Part B covers other medical expenses, such as some doctor’s services, outpatient care, preventive services, and medical supplies. Medicare Part B is covered by the Supplemental Medical Insurance Trust Fund, a plan funded with premiums paid by beneficiaries, investment earnings, and tax revenue.
Medicare Part D - Prescription Drug Coverage
Medicare Part D, Prescription Drug Coverage, helps to cover the costs of prescription drugs, vaccines, and some shots. Medicare Part D, like Medicare Part B, is funded with premiums paid into the Supplemental Medical Insurance Trust Fund.
Medicare Tax Rates
Employers are responsible for withholding taxes from the paychecks of their employees as part of the Federal Insurance Contributions Act (FICA), as well as matching the Medicare tax contribution amount. The current tax rate of Medicare taxes is 1.45% for the employee and 1.45% for the employer, amounting to 2.9% of the worker’s gross income.
Under the Self-Employed Contributions Act (SECA), self-employed individuals are also required to pay Medicare and Social Security tax as a part of the other required self-employment taxes, but these individuals will have to pay the full 2.9%, as they are both the employer and the employee.
Medicare Surtaxes
Along with the regular Medicare tax that is included in FICA tax withholding, there are also Medicare surtaxes that high earners are required to pay. The Affordable Care Act (ACA) introduced the Additional Medicare Tax and Net Investment Income Tax (NIIT) to expand the Medicare program.
Additional Medicare Tax
Aside from regular Medicare tax, there is also an additional Medicare tax that must be paid by individuals whose earned income exceeds certain thresholds. As of 2013, single filers who earn an annual income exceeding $200,000 and married couples who file jointly with their spouse and earn more than $250,000 each year are required to pay the additional Medicare tax.
The rate for additional Medicare tax is 0.9%, but this only applies to the income earned above the threshold limit. Any income earned that is within the threshold is taxed at the regular 1.45% rate.
The additional Medicare tax portion for wage-earning or salary-earning employees will automatically be withheld from their paychecks just like regular Medicare taxes. The only difference is that for additional Medicare tax, there is no employer-paid portion, so the employee is responsible for the full 0.9%. Self-employed individuals will be responsible for paying additional Medicare tax at the same time as their other self-employment taxes.
Net Investment Income Tax
Aside from regular Medicare tax, there is also an additional Medicare tax that must be paid by individuals whose earned income exceeds certain thresholds. As of 2013, single filers who earn an annual income exceeding $200,000 and married couples who file jointly with their spouse and earn more than $250,000 each year are required to pay the additional Medicare tax.
The rate for additional Medicare tax is 0.9%, but this only applies to the income earned above the threshold limit. Any income earned that is within the threshold is taxed at the regular 1.45% rate.
The additional Medicare tax portion for wage-earning or salary-earning employees will automatically be withheld from their paychecks just like regular Medicare taxes. The only difference is that for additional Medicare tax, there is no employer-paid portion, so the employee is responsible for the full 0.9%. Self-employed individuals will be responsible for paying additional Medicare tax at the same time as their other self-employment taxes.
Who Must Pay Medicare Taxes?
Almost all individuals working in the United States are required to pay Medicare taxes. This includes people who earn hourly wages or yearly salaries through an employer, as well as self-employed individuals. Only people earning above the income threshold amount of $200,000 for single files or $250,000 for joint filers have to pay the additional 0.9% of the Additional Medicare Tax.
Which Earnings Are Subject To Medicare Tax?
All of an individual’s earnings are subject to Medicare tax, whether the income was earned through their regular hourly wages, or if they earned additional tips, bonuses, and commissions.
Is Medicare The Same As Medicaid?
Medicare and Medicaid are different types of health insurance programs. While Medicare is federally funded by FICA taxes and offered to senior citizens, the disabled, and people with certain illnesses, Medicaid is a joint federal and state needs-based program offered to individuals based on their financial and medical situation.
If you have any questions about how Medicare taxes impact your business compensation or self-employment income, you may benefit from the help and guidance of an experienced tax professional who is experienced in helping taxpayers minimize their tax liability owed to the IRS. Schedule a free phone consultation with Ideal Tax today to learn how to prepare your income tax return, optimize tax benefits, and save money on taxes.
Luis serves as the Director of Operations for Ideal Tax, overseeing a multifaceted team including case management, tax professionals, document specialists, customer support, training, and development.
