What is Medicare tax: Who pays Medicare tax?

What is Medicare tax?

If you’ve ever looked at your earnings statement from a job, you have likely noticed that some taxes are taken out every pay period. As part of your overall payroll taxes, the federal government requires employers to collect the FICA (Federal Insurance Contributions Act) tax. 

The Social Security tax and Medicare tax are the two taxes all employers must withhold from your pay under FICA.

Medicare is the federal health insurance program created in 1965, for people ages 65 and over, regardless of income, medical history, or health status. The program was expanded in 1972, to cover certain people under age 65 who have a long-term disability.

Medicare tax rates in 2023

You and your employer split the Medicare tax. The current tax rate for Medicare is 1.45% for the employer and 1.45% for the employee, or 2.9% of your gross earnings. 

Who is responsible for paying Medicare tax?

Everyone is responsible for paying into Medicare. All covered wages are subject to Medicare tax. The Medicare tax is a percentage of gross wages that all employees, employers, and self-employed workers must pay to fund Medicare.

Is Medicare a mandatory tax deduction?

Yes, Medicare is a mandatory tax deducted from an employee’s income. There's also no wage base limit for the Medicare tax, meaning that you pay the Medicare tax on every dollar you earn. The Social Security tax, on the other hand, has a wage base limit. For earnings in 2023, that base is $160,200. You stop paying Social Security tax after you hit that amount of pay in a year.

It’s important to note that employment taxes fund Medicare’s Hospital Insurance program. So, all this payroll tax withholding provides you with something in return for those lost dollars in your paychecks over the years.

What is additional Medicare tax?

The Affordable Care Act (ACA) added an extra Medicare tax for high earners. This surtax is known as the additional Medicare tax. As of January 2013, anyone with earned income of more than $200,000 ($250,000 for married couples filing jointly) must pay an additional 0.9% in Medicare taxes beyond the standard 1.45%. That entire 0.9% is the responsibility of the employee. It is not split between the employer and the employee.

Another result of the ACA reforms is the Net Investment Income Tax (NIIT). The NIIT, also known as the Unearned Income Medicare Contribution Surtax, is a 3.8% Medicare tax that applies to investment income and to regular income over a certain threshold.

If your modified adjusted gross income (MAGI) exceeds $200,000 ($250,000 if you’re married and filing jointly) you may be subject to the NIIT. Examples of investment income subject to the NIIT include dividends, interest, passive income, annuities, royalties, and capital gains.

The 3.8% tax applies to the lesser of either your net investment income, or the amount by which your MAGI is more than $200,000 (or $250,000 for joint filers). That means the NIIT acts as either an extra tax on earnings, or an extra tax on investment income.

At what age do you stop paying Medicare tax?

Medicare withholding only stops when you are no longer earning income. You do not need to retire to get Medicare benefits. You may continue working.

After retirement, your source of income usually switches to investment income and retirement benefits, and you typically do not have to pay Medicare or FICA tax on most or all your retirement income.

By paying Medicare taxes, you have paid into a fund to help with Medicare Part A, also known as Hospital Insurance, with eligibility starting at age 65. Medicare Part A covers care received during hospital stays or at a skilled nursing facility.

When are you usually eligible for Medicare Part A?

You are eligible for premium-free Medicare Part A if you are age 65 or older and you or your spouse worked and paid Medicare taxes for at least 10 years.

Why do people decline Medicare Part B?

Usually, there are two reasons you can delay Medicare Part B enrollment without a penalty.

One is that you have health insurance with your employer or your spouse’s employer. If your/spouse’s employer has 19 or fewer employees, then you may need to sign up for Medicare Part A and Part B when you’re first eligible. If you or your spouse’s employer has 20 or more employees, ask the benefits coordinator if you have creditable group health plan coverage as defined by the IRS. If so, you could decline Part B enrollment until you lose either coverage.

The other common reason is that you lived in a foreign country when you turned 65. You’re first eligible to enroll in Medicare Part B the month that you return to the United States to establish your new residence. You won’t pay a late enrollment penalty if you enroll within three months from when you first returned to the U.S.

Medicare tax is one of the cornerstones of your payroll taxes. If you have questions about it, or anything else, we are here for you year-round. Find a local Jackson Hewitt Tax Pro near you.

About the Author

Mark Steber is Senior Vice President and Chief Tax Information Officer for Jackson Hewitt. With over 30 years of experience, he oversees tax service delivery, quality assurance and tax law adherence. Mark is Jackson Hewitt’s national spokesperson and liaison to the Internal Revenue Service and other government authorities. He is a Certified Public Accountant (CPA), holds registrations in Alabama and Georgia, and is an expert on consumer income taxes including electronic tax and tax data protection.

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