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Medicare taxes help fund the government health insurance program that covers millions of senior citizens and Americans with disabilities.

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Even if you don't yet qualify for Medicare health insurance benefits, you may have looked at your paycheck stub and asked yourself: What is the Medicare tax, what is the Medicare tax rate, and how are Social Security and Medicare taxes different?

Truth is, virtually everyone pays taxes that help fund Medicare. Here’s what you need to know about the Medicare tax and how much of your check goes to it each week.

What is the Medicare tax?

We pay many taxes in life: income tax, payroll tax, property tax, sales tax, you name it. We also pay a Medicare tax taken out of our earnings.

The Medicare tax, also referred to as a hospital insurance tax, is a mandatory federal employment tax that's paid both by employers and employees. The proceeds fund much of the Medicare insurance program that seniors and other eligible people use for health care coverage.

The government's costs to run and pay for Medicare are enormous. Consider that, in fiscal year 2019, the Medicare program came with a $644 billion price tag, representing approximately 14% of total federal government spending, per the Peter G. Peterson Foundation. In fact, Medicare typically comprises the second-largest federal budget program, behind only Social Security.

To cover these expenses, Uncle Sam charges a Medicare tax that’s withheld from paychecks or levied as a self-employment income tax for those who work for themselves. This tax funds the Medicare program's Part A, which provides medical/hospital insurance for folks aged 65 and older and those with eligible medical conditions or disabilities. Part A covers inpatient hospital stays, care in a skilled nursing facility, hospice care, and some home health care.

Medicare Part B, which covers doctors' services, outpatient care, medical supplies, and preventive services, is funded through Medicare beneficiary premiums and state and federal revenue.

Key Takeaways

  • Medicare taxes are taken from your income and employers also pay a percentage, too.
  • The Medicare tax rate is 1.45% for the employer and 1.45% for the employee, or 2.9% total. 
  • People who pay Medicare taxes for at least 40 quarters receive free Medicare Part A, which covers hospitalizations. 
  • The federal government also charges an Additional Medicare Tax on richer Americans. 
  • There is also a Social Security Tax that helps fund that program: 6.2% for the employer and 6.2% for the employee, or 12.4% total.

What is Federal Insurance Contributions Act?

The Medicare tax was added to the Federal Insurance Contributions Act (FICA) in 1965 by President Lyndon Johnson, explains Corey Metzman, senior licensed Medicare advisor and COO of Chapter.

"FICA refers to the payroll taxes deducted from both employees' paychecks and employers' expenses to fund Social Security and Medicare benefits. The purpose of the Medicare tax is to provide hospital benefits for retirees as well as those with disabilities. These taxes to which an employee contributes throughout their career help fund Medicare and Social Security and help people greatly reduce their out-of-pocket costs should they need hospital care when they grow older,” Metzman says.

If you’re on pace to receive Social Security benefits at least four months before turning age 65, you can get Medicare Part A, which is free to most Americans. You can also sign up for Part B medical insurance and Part D prescription drug coverage. Or you can also get a Medicare Advantage plan from a private health insurance company that often combines all of that coverage.

If you've worked and paid Medicare taxes for at least 40 quarters, Medicare Part A coverage is free. That's why it pays to be properly taxed for Medicare throughout your career.

Who pays the Medicare tax?

Nearly everyone who works and reports income earned to the government has to pay Medicare taxes.

"Unlike Social Security, which has a cap on income that is collected, Medicare is taxed on all earned income. These taxes are split between the employee and his or her employer and are withheld from their paychecks," says Steve Gaito, a certified financial planner for Retirement Resource Management.

That means you pay half of your required Medicare tax while your employer pays the other half.

"For self-employed people, Medicare taxes are collected through their tax returns. These individuals pay double the amount: both the employee and the employer portion of the Medicare tax," Gaito adds.

2021 Medicare tax rates

The current tax rate for Medicare is 1.45% for the employer and 1.45% for the employee, or 2.9% total. 

So, for instance, if you earn $1,000 each paycheck in gross pay, you'll pay approximately $14.50 during that pay period in Medicare tax. Your employer would also pay a matching $14.50. Self-employment tax is the entire 2.9%, or, in this example, $29.

You may also be charged what's called an "additional Medicare tax.” The added tax applies when your Medicare wages exceed a certain threshold amount based on your tax filing status.

"If the additional Medicare tax applies to you, there is an additional 0.9% you should expect to be withheld from your paycheck through the end of the calendar year for incremental amounts earned over $200,000 if you file as a single filer or earned over $250,000 if you file jointly," Metzman says.

The Medicare premium you can expect to pay when you’re eligible for Medicare coverage depends on the Medicare tax you paid and the income earned. Most people pay $148.50 monthly for Part B, but richer Americans pay more.

"For most people, the Medicare premium rate in 2021 is $148.50 for married households with income up to $176,000 and for single filers with income under $88,000. The premium rate increases to a maximum of $504.90 for married households above $750,000 for single households above $500,000," Gaito notes. "This is important to know before you start taking income that causes taxable income."

Social Security and Medicare

It's easy to get confused by the Social Security tax on your paycheck, which is different from the Medicare tax. Together, they comprise FICA payroll taxes. Both are referred to as "earned benefits" because you've contributed to these benefits throughout your working years.

But Social Security taxes are different. The money collected goes to fund the Social Security program, not Medicare. The current tax rate for Social Security is 6.2% for the employer and 6.2% for the employee, or 12.4% total (all of which is paid by the self-employed), according to the IRS, which equates to more than four times that collected for Medicare.

Frequently Asked Questions

Why do I have to pay an additional Medicare tax?

Additional Medicare Tax applies when your earned Medicare wages surpass a certain threshold based on your tax filing status. Your employer is responsible for withholding a 0.9% Additional Medicare Tax on your wages paid in excess of $200,000 in a calendar year, regardless of filing status.

Your employer is obligated to begin withholding Additional Medicare Tax in the pay period in which it paid wages above $200,000 to you and will continue to withhold this amount each pay period until the end of the calendar year. There's no employer match for Additional Medicare Tax.

When did Medicare become a payroll deduction?

Medicare became a payroll deduction in 1966, a year after the Medicare tax was added to the Federal Insurance Contribution Act (FICA).

Are health insurance premiums exempt from the Medicare tax?

If health insurance premiums are qualified, they’re exempt from both Social Security and Medicare taxes, according to Gaito.

Can you opt out of the Medicare tax?

Nearly all workers in the United States are required to pay Medicare tax.

Ann Martin with Credit Donkey Crypto says there are a handful of exceptions for members of particular religious groups that provide living resources to their elderly members (such as the Amish), foreign government workers who are residing in the US, and some other eligible candidates.