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Medicare Tax: Definition, Rate And Facts

Scott Steinberg4-minute read
January 26, 2021

What is Medicare tax and how does it work? Good question: It’s essentially defined as a payroll tax that’s applied to workers’ gross earnings and self-employed individuals’ personal income that goes to pay for Medicare, a federally mandated health insurance program designed to serve senior citizens. This government-backed health care program, which is built to meet the needs of Americans aged 65 and up and select individuals with disabilities, provides medical benefits that help those in need of insurance coverage. Funds deducted from your paycheck or self-employment earnings help underwrite the costs of the program and ensure that medical costs do not balloon as individuals age.

What is Medicare Tax?

Automatically deducted from your paycheck as part of the Federal Insurance Contributions Act (FICA) tax, Medicare tax is a type of payroll tax that is applied to your gross earnings in addition to Social Security tax. These funds are paid to the United States government, and go to support Medicare, a federally overseen health insurance program that is designed to help support and provide healthcare coverage to older citizens in need of cost-affordable care. Americans aged 65 years and up, and certain individuals living with disabilities, can access this national health insurance program to enjoy manageable medical care. In effect, the monies you pay out as part of Medicare tax go toward helping and supporting others in need. Likewise, the sums deducted from your earnings also ensure that these individuals have proper medical coverage at a time in life when they may be more vulnerable to illness or chronic ailments.

Why Do I Pay Medicare Tax?

The federal government requires everyone who’s an American citizen (including self-employed individuals) to pay funds into Medicare, given its status as a health insurance program meant to serve anyone over age 65, people with disabilities, and those who suffer from end-stage renal disease. The cost of Medicare tax is borne by both (and split equally between) employers and employees, ensuring that both parties pay their fair share. Medicare plays an important role in making sure that every older American citizen has access to affordable healthcare coverage. It also helps keep a lid on medical costs and expenses as citizens age.

What’s The Current Medicare Tax Rate?

Medicare tax was first introduced in 1966 as a tax on working professionals and started at a rate of 0.7%, split between employees and employers, who paid 0.35% apiece. As is still the case today, these sums were deducted from workers’ paychecks, reducing take-home pay. Over time, as the cost of providing health care coverage and medical care has risen, so too has the amount of Medicare tax levied upon individuals’ earnings, although it’s still billed at a rate far below Social Security tax. Currently, the Medicare tax rate is 2.9%, split evenly between workers and the companies for which they work. Unlike Social Security tax though, there is no maximum limit on the level of income to which Medicare tax is applied.

What’s Additional Medicare Tax?

Per the Affordable Care Act (ACA), additional Medicare tax applies to high-income earners. Specifically, an additional 0.9% in Medicare tax is levied on those whose earnings exceed $200,000 as single filers, or $250,000 as joint filers. The additional 0.9% tax applied to these monies is paid for solely by the employee as opposed to jointly split with employers. As above though, any sums that you pay in Medicare tax go to support individuals in need and will go to support your own medical costs and healthcare coverage when you turn 65 as well. In effect, the ACA mandates that an extra Medicare tax (formally known as Additional Medicare Tax) be applied to those who earn significant amounts of income each year.

How Do You Calculate Medicare Tax?

To calculate how much you’ll owe in Medicare tax, simply take your gross earnings and multiply this number times 1.45%. For example, if you make $1,000 every 2 weeks as part of your biweekly payments, you can expect to pay $14.50 each payroll period in Medicare tax. Your employer will pay $14.50 as well. There is no maximum annual limit on how much you can expect to pay in Medicare tax.

However, if you are a high-income earner (over $200,000 or $250,000, respectively, as a single or joint filer), you can expect to pay an additional 0.9% of Medicare tax on gross earnings that exceed these minimums. This additional Medicare tax is only applied to the sums that you have earned that exceed these base thresholds. For example, if you make $210,000 as a single filer in any given year, the additional Medicare tax (which will amount to $90 in total) will apply to $10,000 of your gross earnings.

Self-employed individuals can expect to pay Medicare tax via self-employment tax, which contains payments for both Social Security and Medicare. As self-employed workers are effectively their own employer, they can expect to pay the full 2.9% in Medicare tax on gross earnings. Note that these taxes will be applied to combined wages, tips and income from the given year.

The Bottom Line on Medicare Tax

Medicare tax amounts to your gross earnings multiplied by 1.45% for most working professionals, although high-income earners can expect to see an additional Medicare tax of 0.9% applied to sums earned above $200,000 – $250,000. These monies, which are deducted from each paycheck, go to help pay for Medicare, a federally mandated health insurance program that supports American citizens aged 65 and over, and individuals with disabilities. As part of the FICA tax withholdings, all working professionals (including self-employed individuals) can expect to pay them.

While Medicare taxes can be expected to reduce your total amount of take-home pay, it may be worth remembering that these funds support the needs of many older Americans who may benefit greatly from government-backed health care insurance and medical programs. To learn more about payroll taxes, federal holdings and personal finances, be sure to review other articles in our Learning Center.

Scott Steinberg

Hailed as The Master of Innovation by Fortune magazine, and World’s Leading Business Strategist, award-winning professional speaker Scott Steinberg is among today’s best-known trends experts and futurists. He’s the bestselling author of 14 books including Make Change Work for You and FAST >> FORWARD.