Your Quick & Easy Guide to Medicare Tax 
March 01, 2023
Your Medicare tax is an integral part of your tax contributions. It helps fund the health system in the US so that the people who need it most can benefit from it.
But there is more to know about the Medicare tax. Expanding your background will help you gauge the scope of your tax contributions, whether you are employed by a company, a freelancer, a sole proprietor, or a member of a business partnership.
That said, keep reading this short but informative guide if you want to learn more about Medicare tax and how it works, how much is withheld from your regular pay, and what tax rates are set by the IRS for the 2024 tax year!
- Medicare tax is a type of payroll tax that is made to help fund the Medicare health system of the US.
- Medicare tax is filed under FICA for regular federal income tax and under SECA for self-employed individuals.
- Employers and employees share 1.45% each of the regular 2.9% Medicare tax rates. Self-employed individuals cover the 2.9% tax rate on their own.
- Medicare tax rates for the 2024 tax year are the same as the ones used by the IRS during the 2023 tax year.
- Additional Medicare tax and New Investment Income tax are examples of Medicare surtaxes.
- Medicare surtaxes provide additional funds for the expansion of the said insurance’s coverage.
What is Medicare Tax?
Medicare tax is a payroll tax established by the federal government to help generate funds for the United States’ Medicare health system. It is federal health insurance imposed on employers, employees, and even self-employed individuals.
It is filed under the Federal Insurance Contributions Act (FICA) and the Self-Employed Contributions Act (SECA), alongside the Social Security tax.
Medicare tax is also referred to as the “hospital insurance tax,” and mainly benefits seniors aged 65 and above. It is also meant to help provide medical assistance to citizens who are under 65 but have disabilities and underlying health conditions.
All employers, employees, and self-employed individuals in the U.S. are mandated to pay their share of Medicare taxes from their regular income or earnings, regardless of their filing status, residency status, or citizenship.
How Does Medicare Tax Work?
Medicare tax is imposed through the FICA for employers and their employees. SECA is imposed directly on the earnings of self-employed individuals, independent contractors, and freelancers.
Employers withhold their employees’ share of Medicare taxes (under FICA). They also share their percentages in Medicare taxes.
Meanwhile, self-employed individuals cover the combined percentages in Medicare tax rates (2.9%) normally shared between employers and their workers. In addition, all taxes collected for Medicare are transferred to the Hospital Insurance Trust Fund, which is secured by the US Treasury.
Medicare Tax Rates for 2024
The IRS determines the tax rates for Medicare taxes. For the 2024 tax year, the IRS retains the Medicare rates from the previous year.
In other words, the tax rate remains at 2.9%. The 2.9% Medicare tax rate is then shared between employers and employees, yielding equal tax obligations of 1.45% each.
Since self-employed individuals cover the combined tax rate normally shared between companies and their workers, their Medicare tax rates are 2.9%.
There are no wage base limits for Medicare taxes, but an Additional Medicare Tax is imposed on individuals or employees earning a significantly higher income.
Medicare surtaxes are part of the provisions of the Affordable Care Act of 2010, whose goal is to provide additional funding for the expansion of Medicare coverage.
The said provision proposes a 3.8% “net investment income tax” or Medicare surtax that is imposed on taxpayers whose regular earnings exceed that of their Modified Adjusted Gross Income (MAGI).
There are two different types of Medicare surtaxes:
#1. Additional Medicare Tax
The Additional Medicare tax applies to all citizens or individuals whose regular wages and self-employment earnings do not exceed specified wage thresholds.
Listed below are the three different filing statuses and their threshold amounts for additional Medicare Tax:
- $200,000 for all taxpayers (single and head of household)
- $125,000 for married taxpayers who are paying separately
- $250,000 for married taxpayers paying jointly and qualified widow/widower with a child or dependent.
Based on the threshold amounts, a single filer that earns $250,000 covers the additional 0.9% for the first $200,000 in their paycheck.
Employers do not split the 0.9% Additional Medicare Tax with their employees as they normally would with FICA.
#2. New Investment Income Tax
The Net Investment Income Tax (NIIT) is a 3.8% tax rate imposed on taxpayers who make a high income and have investment income. As long as a family, business, individual, or estate belongs to a specific income threshold, they are likely to be taxed for NIIT.
Generally speaking, all investment income is taxable. The difference that will help determine everyone’s tax rate is based on the type of investment and the taxpayer’s tax bracket.
Medicare Tax FAQ
#1. What is Medicare tax?
Medicare tax is a type of federal income tax that is imposed on employers, employees, and self-employed individuals. It is mainly designed to provide funding for medical or health-related insurance.
#2. What is Medicare tax used for?
Medicare tax is used to help fund the medical health programs of the federal government and ensure that all eligible and future beneficiaries get to accept the help and maximize the benefits they can get through Medicare programs.
#3. Do I have to pay Medicare tax?
#4. What is the Medicare tax rate for 2024
The Medicare tax rate for 2024 retains the tax rates that were imposed in the 2023 tax year. Employers and employees split the 2.9% tax rate, meaning that they pay 1.45% each in Medicare taxes. Self-employed individuals cover the entire 2.9%.
Medicare taxes are essential because they aid in providing resources to boost the government’s health programs. Whether you are an employer, an employee, a sole proprietor, or a freelancer, it is your duty to check that the correct amount is withheld or paid for your taxes owed.
After all, if you ever end up becoming a beneficiary of Medicare, you would want to get the best services and healthcare facilities. To make that possible, taxpayers must fulfill their Medicare tax obligations with accuracy.