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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.
Alieza Durana
By Alieza Durana 
Updated
Edited by Chris Davis

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Nerdy takeaways
  • 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.

  • Other Medicare surtaxes may apply to high-earning individuals and families.

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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 2023 and 2024 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. 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.

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Other Medicare tax details to know

The Affordable Care Act created two other 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

About Medicare

Medicare is a federal insurance program that covers certain health care costs for people over age 65 and disabled people. Upon qualifying for Medicare, you may either enroll in the original Medicare coverage, or a private plan known as Medicare Advantage. People often qualify during the three months before or after their 65th birthday.

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Medicare Parts A, B, C and D: What’s the difference?

  • Medicare Part A provides insurance for certain hospital, in-patient, hospice and home care services. It’s also premium-free for most people.

  • Medicare Part B covers out-patient care, such as doctor’s appointments and preventative services. 

  • Medicare Part C, also known as Medicare Advantage, is a type of private insurance plan that covers services detailed in Medicare Parts A, B and D.

  • Medicare Part D insurance covers the cost of generic and premium prescription drugs. 

  • Medigap is available for original medicare enrollees, and covers the difference between what insurance pays and any additional (uncovered) costs.

Have more questions? Visit Medicare.gov or call 800-MEDICARE (800-633-4227, TTY 877-486-2048).

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