Medicare tax is a U.S. payroll tax deducted from individuals’ wages and self-employment income to help fund the Medicare program, which provides health insurance to people aged 65 and older and certain younger individuals with disabilities. Medicare tax is specifically designated to fund Medicare Part A (hospital insurance), Medicare Part B (medical insurance), and Medicare Part D (prescription drug coverage). In this article, we’ll discuss how Medicare tax works as well as the current Medicare tax rate.
How does Medicare tax work?
Medicare tax operates as a mandatory payroll tax with contributions from both employees and employers to fund the Medicare program. The tax is withheld from employees' wages, and employers are responsible for remitting these contributions to the IRS. The withheld amount is then contributed to the Medicare program. In addition to withholding the Medicare tax from employees' wages, employers must contribute an amount equal to the employees' withholding.
The funds collected through Medicare taxes go into the Hospital Insurance (HI) Trust Fund, which helps pay for Medicare Part A benefits, such as inpatient hospital care, skilled nursing facility care, and some home healthcare. In addition to the standard Medicare tax, there is an Additional Medicare Tax that applies to individuals with higher incomes.
What is the Medicare tax rate?
As of 2024, the Medicare tax rate is 1.45% for both the employer and the employee, totaling 2.9%. There is also an Additional Medicare Tax of 0.9% on earned income above certain thresholds ($200,000 for single filers and $250,000 for married couples filing jointly). Employers are responsible for withholding the 0.9% Additional Medicare tax on an individual's wages paid in excess of $200,000 in a calendar year, regardless of their filing status.
This means that in 2024, an employee will pay a 6.2% Social Security tax on the first $168,600 of wages and a 1.45% Medicare tax on the first $200,000 of wages, with an additional 0.9% Medicare tax on all wages in excess of $200,000.
While Medicare taxes are separate from Social Security taxes, both programs are funded through payroll taxes and administered by the Social Security Administration. Unlike the Social Security tax, which has a wage base limit, the Medicare tax is assessed on all earned income, with no cap or limit on the amount of income subject to the tax. Therefore, all earned income is subject to the Medicare tax, regardless of the amount.
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