What is the Medicare tax and who pays it? Experts explain

For the government to provide Medicare to 67.4 million people a month, it has to get the money from somewhere.

These funds, totaling $1 trillion in 2023, come from a combination of government contributions, payroll taxes and monthly premiums paid by Medicare beneficiaries. Each part of Medicare is financed by different methods, and funds allocated to one part of the program cannot be used to cover expenses for another part.

The term Medicare tax, also known as the hospital insurance tax, refers to a 2.9% tax on the wages and income of current U.S. workers and is the primary source of funding for Medicare Part A (hospital insurance). In 2023, the Medicare tax contributed approximately $368 million to Medicare.

“Employees, employers and the self-employed pay the Medicare tax to support our Medicare program for older and disabled Americans,” says Dr. Ge Bai, CPA, professor of accounting at Johns Hopkins Carey Business School.

Employer and employee Medicare tax contributions

Employers are required to withhold Medicare tax from their employees.

“The employer and employee each contribute 1.45% of gross earnings, for a total of 2.9% of the Medicare withholding tax,” says Bai.

Here’s an example, says Bai: An employee earns $5,000 each pay period. In addition to income taxes and Social Security taxes, a portion of the Medicare tax, which is 1.45% of that $5,000, or $72.50, will be withheld from this payroll. The same amount ($72.50) will be withheld from the employer’s income. The entire amount ($145) will be sent by the employer to the tax office.

Self-employed people pay Medicare tax

Business owners, contractors and freelancers are considered self-employed.

In addition to annual tax returns, self-employed people typically pay estimated taxes quarterly.

“These taxes include the self-employment tax, which is 15.3%,” says Paul Miller, CPA, founder of Miller and Company. This rate includes 12.4% Social Security tax and 2.9% Medicare tax.

Miller gives the following example: A business owner estimates his quarterly salary and net profit at $20,000. In addition to income taxes and Social Security taxes, Medicare tax, or 2.9% of that $20,000, or $580, will have to be sent to the IRS.

Additional Medicare tax for high-income earners

In 2013, the additional Medicare tax went into effect. It added an additional 0.9% Medicare tax on employee earnings and self-employed income above a certain threshold.

For employees, the threshold will be $200,000 in 2024.

That means for every dollar you earn over $200,000, your Medicare tax withholding will be 3.8%, or 2.9% plus 0.9%, Bai says.

For self-employed people, the thresholds vary depending on your tax filing status, Miller says. An additional tax of 0.9% will be charged if your self-employed income, wages and salaries (including your spouse’s income if filing a joint return) exceed the threshold required for your filing status:

• The married couple pledges jointly: $250,000

• Married filing separately: $125,000

• Single: $200,000

• Head of household (with qualifying person): $200,000

• Eligible surviving spouse with dependent child: $200,000

Medicare tax payments to beneficiaries

The Medicare tax applies even if you are on Medicare and still working. If you receive wages or income from work, they are subject to the same Medicare tax rules, Bai says.

More about Medicare:

This story was originally published on Fortune.com