Subscribe
Anybody who’s gotten a paycheck has been charged Medicare tax. It’s deducted automatically from every paycheck a worker gets across the US. And Medicare tax matters even more if you’re 60 or older. Why? Because retirement doesn’t remove your responsibility to pay income tax, nor Social Security and Medicare tax– known as FICA taxes.
The Medicare tax rate in 2024 is 2.9%, but it’s split evenly between employees and employers. Self-employed individuals must pay the full 2.9% themselves.
The Social Security tax rate in 2024 is 12.4%, but it’s split evenly between employees and employers. Self-employed individuals must pay the full 12.4% themselves.
What is Medicare tax?
The Medicare tax definition is “the federal employment tax which funds portions of the Medicare insurance program.” Also known as hospital insurance tax, the federal Medicare tax helps fund Medicare insurance plans. This tax is either withheld from your paycheck if you’re an employee or paid entirely by you if you’re self-employed—very similar to Social Security tax.
Specifically, Medicare taxes go towards hospital insurance for people with certain conditions and people aged 65 years or older. This is called “Part A” of the Medicare program. Part A covers nursing home care, hospice, hospital visits, and a bit of home healthcare.
After withholding these taxes from the paychecks of self-employed folks, the money goes into trust funds at the US Treasury. The money for other facets of Medicare (Part B and Part D) is kept in these accounts too and comes from beneficiary premiums.
All of this money is reserved for Medicare beneficiaries, both future and present.
Social Security tax
Though Social Security tax is technically separate from Medicare taxes, it’s just as important to be aware of them. Because both fall under the umbrella of FICA taxes, you’re not excused from paying them just because you retire.
The Social Security tax is paid by both the employer and employee, just like the Medicare tax. It pays for disability, retirement, and survivorship benefits for millions of Americans every year. The 2024 rate is 12.4% on all earnings above $168,000. Note that in 2023 the taxable minimum was $160,200, so the wage base increased by 5.2% for 2024.
For the 2024 tax year, you’ll pay 6.2%. Your employer pays the remaining 6.2%. If you’re self-employed, you’re responsible for the full 12.4%. But unlike Medicare taxes, there’s a limit– once you hit base earnings of $168,000, you won’t pay any more Social Security tax in the remainder of that tax year.
For example, let’s say you earned $170,000 in taxable wages throughout 2024. As an employee, you’d pay $10,453 in Social Security taxes (which is 6.2% of $168,000). If you’re self-employed, you’d pay $20,906 (which is 12.4% of $168,000).
Net investment income tax
Also known as the “unearned income Medicare contribution surtax,” the net investment income tax applies as of 2021. Net investment income is now subject to an added 3.8% tax. Since investment income doesn’t involve employers, you have to pay this tax on your own.
Eligible income can include rental income, nonqualified annuities, dividends, taxable interest, and capital gains. Luckily, it excludes tax-exempt municipal bond interest and other income that’s already exempted.
This tax applies to either your modified adjusted gross income (MAGI) in certain cases or your net investment income, whichever is less.
For example, let’s use a married couple earning $210,000 in wages and filing jointly. Within that tax year, they also received investment income totaling $80,000. Their MAGI would be $290,000 for that year. This tax has a $250,000 limit for married couples filing jointly. The couple has to pay 3.8% tax on either the total investment income ($80,000) or the excess MAGI ($40,000), whichever is less. In this case, the couple would pay $1,520, or 3.8% of their $40,000 excess MAGI.
How to calculate Medicare tax
To calculate what you’ll be expected to pay towards Medicare tax, determine your role and filing status first. Are you self-employed, an employer, or an employee? Are you filing individually or as a married couple?
The government requires single filers earning more than $200,000 in a tax year and married couples earning more than $250,000 to pay the additional Medicare tax. Keep your status in mind as you read the instructions below.
If you’re self-employed…
Self-employed folks are on the hook for the full Medicare tax. You’ll have to pay 2.9% of your gross income towards this, while employees/employers split the bill.
To calculate Medicare tax while self-employed, look at your income projections for the year. Multiply that by 2.9% to figure out your approximate Medicare tax costs for the year.
If you’re an employer…
Employers pay 1.45% of the Medicare tax for each employee’s gross pay, up to $200,000 for single filers and $250,000 for married couples. If any of your employees earn above these thresholds, you won’t have to keep paying– because that employee has hit the Medicare tax limit.
Have your bookkeeper review each employee’s filing status, projected wages for the coming year, and compare that to the IRS thresholds. Multiply the proper amounts by 1.45%, and that’s how much Medicare tax your business will pay this year.
If you’re an employee…
Employees pay the remaining 1.45% of Medicare tax from each paycheck, up to $200,000 of gross income for single filers and $250,000 for married couples. Once you’ve passed this threshold, you’ll pay only 0.9% on gross income for the rest of the tax year.
To calculate how much you’ll pay towards the Medicare tax in a tax year, consider your filing status and income projections. Multiply your projected gross income (under the proper threshold) by 1.45%, and any income over the threshold by 0.9%. Add up these amounts and you’ll have your Medicare tax payment projection for the year!
Are Medicare premiums tax deductible?
Yes, in certain cases, your Medicare premiums and expenses may be tax-deductible! Typically, you aren’t allowed to deduct premiums pretax. But they are eligible for your yearly itemized deductions.
Basically, the IRS lets you deduct the full amount you spend on your medical care, and that includes your Medicare premiums… so long as the amount is more than 7.5% of your adjusted gross income (AGI). Your AGI is how much money you made in a tax year, after taxes (including insurance, copay, and Medicare deductibles).
The exact rules on what you can deduct vary depending on your situation, including your employment status and income. But generally, you can deduct premiums for Part A, B, C, D, and even Medigap. You’ll get a form SSA-1099 that lists some of your deductible expenses, but save your receipts for medical expenses, insurance statements, and summary notices throughout the year. This guarantees you won’t miss any deductibles.
When you file your taxes, add up all the money you spent on medical care for the year in question. Use the right IRS Form for you and enter your medical expenses. On a 1040 or 1040-SR, this would be lines 1 – 4. Just remember that you can only deduct the amount that exceeds 7.5% of your AGI.
Let’s say you have an AGI of $50,000, for example. After adding up all your medical expenses for the year, your grand total is $7,500. You’d be able to deduct $3,750: 7.5% of $50,000 is $3,750, and $7,000 minus $3,750 is $3,750.
Why do I pay Medicare tax? And what is Medicare tax used for?
Frankly, you pay Medicare tax for the same reason you pay other taxes. In the US (and other modern countries), the government collects taxes from individuals and businesses. They use tax money to fund public services and public works projects.
Then, the same individuals and businesses who paid taxes benefit from the public services and works. Medicare tax is exactly the same. You and I pay into it while we’re employers or employees, which supports the health of our aging population. Once we’re of a certain age, we receive public health services while the younger people work and pay into the fund.
Ideally, the cycle continues forever, allowing the US to offer public health and support services to each new generation as they age.
All in all, there’s a lot of important information you need to know about Social Security and Medicare tax.
To read the IRS FAQs on Medicare Tax, click here.
Questions about Medicare?
Shoot us an email at medicare@hihella.com.
Article updated on January 19, 2024.
