Medicare Tax: What Is It and Who Pays It?

What Is Medicare Tax?

Medicare tax is a federal employment tax that funds a portion of the Medicare insurance program. In 2024, the Medicare tax rate is 1.45% for an employee and 1.45% for an employer, for a total of 2.9%. Like Social Security tax, Medicare tax is withheld from an employee’s paycheck or paid as a self-employment tax. It's sometimes referred to as the “hospital insurance tax,”

Medicare tax pays for Part A of the Medicare program that covers hospital insurance for individuals age 65 or older and those with certain disabilities or medical conditions. Medicare hospital insurance covers hospital visits, hospice, nursing home care, and some home healthcare.

Key Takeaways

  • Medicare taxes fund hospital, hospice, and nursing home expenses for elderly and disabled individuals.
  • In 2024, the Medicare tax rate is 2.9%, split between the employee and their employer.
  • Self-employed individuals are responsible for both portions of Medicare tax.

Contributions to Medicare

Nearly everyone who works in the U.S. is required to pay Medicare taxes. Under the Federal Insurance Contributions Act (FICA), employers withhold Medicare and Social Security taxes from employees’ paychecks. The Self-Employed Contributions Act (SECA) mandates that self-employed workers pay Medicare and Social Security tax as part of their self-employment tax.

Medicare taxes and Social Security taxes held in trust funds by the U.S. Treasury. Medicare tax is kept in the Hospital Insurance Trust Fund and is used to pay for Medicare Part A. Costs of Medicare Part B, medical insurance, and Medicare Part D, prescription drug coverage, are covered by the Supplemental Medical Insurance Trust Fund, funded with premiums paid by beneficiaries, tax revenue, and investment earnings.

The money is intended for current and future Medicare beneficiaries; however, the Hospital Insurance Trust Fund has historically faced solvency and budget pressures and is expected to be exhausted by 2031. Medicare services may be cut, or lawmakers may find other ways to finance these benefits.

2024 Medicare Tax Rates

In 2024, the Medicare tax rate is 2.9%, split evenly between employers and employees. W-2 employees pay 1.45%, and their employer covers the remaining 1.45%. Self-employed individuals, as they are considered both an employee and an employer, must pay the entire 2.9%.

Unlike Social Security tax, there is no income limit to which Medicare tax is applied. An individual’s Medicare wages are subject to Medicare tax. This generally includes earned income such as wages, tips, vacation allowances, bonuses, commissions, and other taxable benefits.

Medicare Surtaxes

In 2013, the Affordable Care Act (ACA) introduced two Medicare surtaxes to fund Medicare expansion: the additional Medicare tax and the net investment income tax. Both surtaxes apply to high earners and are specific to different types of income. It is possible for a taxpayer to be subject to both Medicare surtaxes.

Additional Medicare Tax

Individuals whose earned income, including wages, compensation, and self-employment income, exceeds certain thresholds pay additional tax. Single filers who earn more than $200,000 and married couples filing jointly who earn more than $250,000 contribute more to Medicare.

The additional Medicare tax rate is 0.9% but only applies to the income above the taxpayer’s threshold limit. For an individual earning $225,000 a year, the first $200,000 is subject to a Medicare tax of 1.45%, and the remaining $25,000 is subject to an additional Medicare tax of 0.9%. The surtax is withheld from an employee’s paycheck or paid with self-employment taxes, with no employer-paid portion.

Net Investment Income Tax

The net investment income tax, also known as the “unearned income Medicare contribution surtax,” is an additional 3.8% tax applied to net investment income. Like the additional Medicare tax, there is no employer-paid portion.

Net investment income may include taxable interest, dividends, nonqualified annuities, capital gains, and rental income. It does not include income excluded for income tax purposes, such as tax-exempt municipal bond interest. Net investment income tax is applied to an individual’s net investment income or the excess modified adjusted gross income (MAGI) over certain thresholds, whichever is less.

If a married couple filing jointly earned $225,000 in wages plus $50,000 in investment income, their MAGI is $275,000. The net investment income tax threshold for married couples filing jointly is $250,000. The couple pays a 3.8% tax on the lesser of the excess MAGI ($25,000) or the total investment income ($50,000). In this case, the couple would owe a net investment income tax of $950 (3.8% x $25,000). 

What Is Medicare Tax Used for?

Medicare tax is used to fund the Medicare health system in the United States. The tax funds are used for Medicare Part A, which covers hospital insurance for senior citizens and those with disabilities. Part A costs include hospital, hospice, and nursing facility care.

What Is the Medicare Tax Rate?

The Medicare tax rate in 2024 is 2.9%. This amount is split evenly between an employer and employee, each paying 1.45%. The amount is withheld from an individual's paycheck.

Does Everyone Have to Pay Medicare Tax?

All employed individuals in the United States pay the Medicare tax, even if the employee or employer is not a citizen of the country.

The Bottom Line

The Medicare tax is a tax charged to individuals in order to fund the Medicare system. The tax is charged to people on their paychecks, much like the Social Security tax. The Medicare tax rate is 2.9% which is split between the employer and the employee.

Article Sources
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  5. Centers for Medicare & Medicaid Services. "."
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