What Is Medicare Tax?

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Medicare is a federal health insurance program that covers nearly 64 million Americans. But even for those of us who don’t use Medicare health insurance, our pay stubs still show a deduction for Medicare tax each pay period.

That leads to questioning, “Well, what is Medicare tax?” It turns out paying Medicare tax your entire working life allows you to use Medicare when you meet the qualifications, as most users are aged 65 and over.

To learn more about Medicare tax, keep reading.

What Is Medicare Employee Tax?

The government requires US-based workers to pay tax on their wages. These taxes are part of the Federal Insurance Contributions Act (FICA).

When we look at our paychecks, we see Medicare and Social Security tax together as a single deduction for FICA. The deduction happens automatically as part of the payroll process.

The self-employed also need to pay Medicare and Social Security tax through the Self-Employed Contributions Act (SECA).

The idea is that you pay into these programs throughout your working life to use them when you reach retirement age.

What Is the Medicare Tax Rate?

The current Medicare tax rate is 1.45% for the employer and 1.45% for the employee, which totals 2.9% total.

The self-employed need to pay both portions of Medicare tax (2.9%). But they only do so on 92.35% of their net profit.

Unlike Social Security tax, there is no wage base limit for Medicare tax. This means all wages are subject to Medicare tax.

What Is Medicare Tax Used For?

The government established the Medicare tax in 1966 to solve the growing health care problems. Many seniors couldn’t afford health insurance because their incomes declined after retirement.

Yet, during aging, health care costs typically increase. At this time, some insurance companies were canceling policies for the elderly because they were high-risk.

So, the Medicare tax pays for Medicare Part A. This covers the following:

  • Hospital stays
  • Nursing care
  • Hospice care
  • Select home health services

The revenue for Medicare Part A goes into the Hospital Insurance (HI) trust fund. However, current Medicare users are depleting this account because of the rising costs of health care.

In 2021, the Congressional Budget Office said the fund may be empty by 2026.

What Is Additional Medicare Tax?

The Affordable Care Act (ACA) mandates an additional tax for high-income earners. The surtax is applied to:

  • Wages
  • Railroad retirement (RRTA) compensation
  • Self-employment income

Even though it has Medicare in its name, it doesn’t pay Medicare like the FICA Medicare tax. Instead, it only offsets the costs of the ACA.

What Percentage Is the Medicare Tax Surtax?

The Medicare surtax for the ACA applies to individuals who earn more than $200,000 and married couples who file jointly who earn more than $250,000.

The current rate is 0.9%. This rate only applies to the income above the threshold limit. For example, an individual who makes $300,000 a year pays:

  • 1.45% on the first $200,000
  • 0.9% on the remaining $100,000

What Is Medicare Tax, Explained

Now that we’ve answered the question, “What is Medicare tax?” you have a clear idea of how this tax affected your working wages. Since you’ve paid into the Medicare system, you can make the best of it by choosing and using a Medicare plan.

If you want to know more about the best Medicare plan for you, schedule an appointment with us at Medicare Help Now. We’ll provide you with an individual consultation so you can make an informed decision.

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