Medicare tax rate 2021 : Why you pay it ?

Why you can trust Insure.com

Quality Verified

At Insure.com, we are committed to providing the timely, accurate and expert information consumers need to make smart insurance decisions. All our content is written and reviewed by industry professionals and insurance experts. Our team carefully vets our rate data to ensure we only provide reliable and up-to-date insurance pricing. We follow the highest editorial standards. Our content is based solely on objective research and data gathering. We maintain strict editorial independence to ensure unbiased coverage of the insurance industry.

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 $767 billion price tag, representing approximately 13% 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 the 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, a Medicare advisor.

“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.

2022 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 $170.10 monthly for Part B, but richer Americans pay more.

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.

Sources:

Peter G. Peterson Foundation. “Budget Basics: Medicare.” Accessed August 2022.

Internal Revenue Service. “Topic No. 751 Social Security and Medicare Withholding Rates.” Accessed August 2022.

Disclaimer:

Insure.com is not affiliated with or endorsed by the government or Federal Medicare program. Plans are insured or covered by a Medicare Advantage organization with a Medicare contract and/or a Medicare approved Part D sponsor. Enrollment in the plan depends on the plan’s contract renewal with Medicare. We do not offer every plan available in your area. Any information we provide is limited to those plans we do offer in your area. Please contact Medicare.gov or 1-800-MEDICARE (TTY 1-877-486-2048), 24 hours a day/7 days a week, to get information on all of your options. Not all plans offer all of these benefits. Benefits and availability may vary by carrier and location. Limitations and exclusions may apply. Every year, Medicare evaluates plans based on a 5-star rating system. Part B Premium give-back is not available with all plans. Actual Part B premium reduction could be lower. Deductibles, copays and coinsurance may apply.

MULTI-PLAN_QS-INMedicareTaxarticle_C

Erik Martin

Contributing Researcher

Erik J. Martin is a Chicago area-based freelance writer whose articles have been published by AARP The Magazine, The Motley Fool, The Costco Connection, USAA, US Chamber of Commerce, Bankrate, The Chicago Tribune, and other publications. He often writes on topics related to insurance, real estate, personal finance, business, technology, health care, and entertainment. Erik also hosts a podcast and publishes several blogs, including Martinspiration.com and Cineversegroup.com.