American workers have taxes for Social Security and Medicare withheld from their paychecks. Together, these two income taxes are known as the Federal Insurance Contributions Act (FICA) tax.
The 2021 Medicare tax rate is 2.9%. Typically, you’re responsible for paying half of this total Medicare tax amount (1.45%) and your employer is responsible for the other 1.45%. Your Medicare tax is deducted automatically from your paychecks.
The Medicare tax that is withheld from your paychecks helps fund health care costs for people enrolled in Medicare.
Medicare is financed through two trust fund accounts held by the United States Treasury:
The funds in these trusts can only be used for Medicare.
The Hospital Insurance Trust is largely funded by Medicare taxes paid by employees and employers, but is also funded by:
The Hospital Insurance Trust Fund pays for Medicare Part A benefits and Medicare Program administration costs. It also pays for Medicare administration costs and fighting Medicare fraud and abuse.
This trust is largely funded by the premiums paid by people enrolled in Medicare Part B (medical insurance) and Medicare Part D (Medicare prescription drug plans), but it is also funded by:
The Supplementary Medical Insurance Trust Fund pays for:
The Affordable Care Act (ACA) was passed in 2010 to help make health insurance available to more Americans.
To aid in this effort, the ACA added an additional Medicare tax for high income earners. This raised the tax (as of 2021) from 1.45 percent to 2.34 percent for people with an earned annual income of more than $200,000 ($250,000 for married couples filing jointly).1
The additional tax (0.9% in 2021) is the sole responsibility of the employee and is not split between the employee and employer.
If you make more than $200,000 per year in 2021, the 0.9 percent surtax only applies to the amount you make that is over $200,000. For instance, if you make $300,000 per year, you and your employer each pay the standard 1.45 percent Medicare tax for the first $200,000 you make, and you pay the additional 0.9 percent Medicare tax on the $100,000 that is left.
Even if you are self-employed, the 2.9% Medicare tax applies.
Typically, people who are self-employed pay a self-employment tax of 15.3% total – which includes the 2.9% Medicare tax – on the first $142,800 of net income in 2021.2
The self-employed tax consists of two parts:
You can deduct the employer-equivalent portion of your self-employment tax in figuring your adjusted gross income. If you’re unsure of how to do this, a tax professional may be able to help.
If you’d like more information about Medicare, including your Medicare enrollment options, a licensed insurance agent can help.
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1 Internal Revenue Service. Questions and Answers for the Additional Medicare Tax. (Feb. 16, 2021). www.irs.gov/businesses/small-businesses-self-employed/questions-and-answers-for-the-additional-medicare-tax.
2 Internal Revenue Service. Self-Employment Tax (Social Security and Medicare Taxes). (Jan. 19, 2021). Retrieved from www.irs.gov/businesses/small-businesses-self-employed/self-employment-tax-social-security-and-medicare-taxes.