What Are Medicare Taxes?

Medicare taxes are payroll taxes that fund the federal health insurance program for people 65 and older, as well as certain younger individuals with disabilities. Workers and employers each pay a percentage of wages toward Medicare, while high-income earners may owe an additional surtax on earnings above set thresholds. These taxes help cover hospital care and other healthcare services provided through Medicare.

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What Is Medicare?

provides healthcare coverage to older adults, as well as younger individuals who qualify because of certain disabilities or end-stage renal disease. The program is organized into separate parts that address different medical needs.

Part A helps pay for inpatient hospital care, skilled nursing facility services and some home-based care. Part B focuses on outpatient services, including doctor visits, routine screenings and medical equipment. Many beneficiaries also opt for Part D prescription drug plans or choose Medicare Advantage options offered by private insurers that bundle various benefits together.

Medicare Taxes: The Basics

Medicare’s Hospital Insurance program is funded through payroll taxes collected from workers and employers. These taxes support Medicare Part A, which covers services like inpatient hospital care, skilled nursing facility stays and certain home health services. When wages are paid off the books, neither the worker nor the employer contributes to this system, which reduces future access to earned Medicare benefits.

Medicare HI taxes were first collected in 1966 at a combined rate of 0.7%, with workers and employers each covering 0.35% of wages. The rate has increased over time as the program expanded and healthcare costs rose, though it remains lower than the Social Security payroll tax. For comparison, Social Security taxes total 12.4%, split evenly between employers and employees.

The current Medicare payroll tax rate is 2.9%, with employees and employers each paying 1.45%. And unlike Social Security taxes, which apply only up to an annual wage cap, Medicare taxes apply to all earned income with no upper limit.

Medicare Taxes and the Affordable Care Act

The Affordable Care Act added an extra Medicare tax for high earners.

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) has to 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.

If your income means you’re subject to the Additional Medicare Tax, your Medicare tax rate is 2.35%. However, this Medicare surtax only applies to your income in excess of $200,000. If you make $250,000 a year, you’ll pay a 1.45% Medicare tax on the first $200,000, and 2.35% on the remaining $50,000.

Net Investment Income Tax (NIIT)

Another result of 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 exceeds $200,000 ($250,000, if you’re married filing jointly) you may be subject to the NIIT. Examples of investment income that is 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 exceeds $200,000 (or $250,000 for joint filers). That means the NIIT acts as either an extra income tax or an extra capital gains tax. You can report your net investment income on IRS Form 8960.

According to the IRS, a taxpayer may be subject to both the Additional Medicare Tax and the NIIT, but not necessarily on the same types of income. That’s because the 0.9% Additional Medicare Tax applies to wages, compensation and self-employment income over the $200,000 limit, but it does not apply to net investment income.

Bottom Line

Medicare’s Hospital Insurance program is funded by employment taxes.

The combination of Social Security and Medicare tax rates, plus the income tax withheld from your paycheck, puts a serious dent in your take-home pay. Currently, the employee share of Social Security and Medicare taxes is 7.65% (6.2% for Social Security and 1.45% for Medicare). If you make over $200,000, remember to account for the Additional Medicare Tax. It may seem like a lot of trouble now, but all this tax withholding is designed to give you a safety net when you reach retirement.

Healthcare Tips

If you need help with Medicare taxes or any other financial issue, consider working with a financial advisor. They can walk you through everything you need to know. SmartAsset’s free tool matches you with vetted financial advisors who serve your area. You can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
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