What Is Medicare Tax? Definition, How It Works
All employees pay 1.45% in Medicare taxes. People earning above a certain threshold may also face an additional 0.9% tax on income or a 3.8% tax on investment income.
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- Medicare is a federal health insurance program, and the medicare tax funds medical, hospital and hospice care.
- The Medicare tax is a mandatory payroll tax.
- Medicare surtaxes may apply to high-earning individuals and families.
What is the Medicare tax?
On July 30, 1965, President Lyndon B. Johnson signed Medicare into law to help cover healthcare costs after age 65, as well as for people with disabilities and certain illnesses. The Medicare tax, which is a type of payroll tax, funds medical, hospital and hospice care for these groups.
What is the Medicare tax rate?
The Medicare tax rate for 2024 and 2025 is 2.9% and is split between employees and their employer, with each paying 1.45%. It’s a mandatory payroll tax applied to earned income and wages, and comes out of your paycheck just like Social Security tax. Employers who don’t pay face a penalty.
If you’re self-employed, you’ll be responsible for paying both the employer and employee contribution, totaling 2.9%. The good news is that you can likely deduct half of your total self-employment tax when you file your return.
What are the Medicare surtaxes?
A surtax is an additional tax certain people are subject to on top of an existing tax. The Affordable Care Act created two Medicare surtaxes on high earners to fund additional services: the additional Medicare tax and the net investment income tax.
Additional Medicare tax
The additional Medicare tax, also known as the “high earners tax,” is a 0.9% tax on income above $200,000 for individuals or $250,000 for married couples filing jointly.
Net investment income tax
A 3.8% net investment income tax (NIIT) may apply to investment income, which includes capital gains, dividends, annuity distributions, royalties, rent and interest. The income eligibility threshold varies based on your tax filing status, says Colleen Carcone, a Certified Financial Planner and the Director of Wealth Planning Strategies for TIAA in Boston.
“Partnering with an advisor to create a more customized portfolio that considers tax efficiency can help to reduce your exposure to that net investment income tax,” says Carcone.
The full list of income threshold amounts for Medicare surtaxes are below
| Filing Status | Threshold Amount |
|---|---|
| Head of household (with a qualifying person) | $200,000 |
| Married filing jointly | $250,000 |
| Married filing separately | $125,000 |
| Single | $200,000 |
| Qualifying widow(er) with dependent child | $250,000 |
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- 1. Internal Revenue Service. Find out if Net Investment Income Tax applies to you. Accessed Nov 22, 2023.
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