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 2019 Medicare tax rate is 2.9 percent.
Typically, you’re responsible for paying half of this total Medicare tax amount (1.45 percent) and your employer is responsible for the other 1.45 percent. Your Medicare tax is deducted automatically from your paychecks.
Where do Medicare taxes go?
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:
- Hospital Insurance Trust Fund
- Supplementary Insurance Trust Fund
The funds in these trusts can only be used for Medicare.
Hospital Insurance Trust Fund
The Hospital Insurance Trust is largely funded by Medicare taxes paid by employees and employers, but is also funded by:
- Interest earned on trust fund investments
- Income taxes paid on Social Security benefits
- Medicare Part A premiums from people who are not eligible for premium-free Part A
The Hospital Insurance Trust Fund pays for Medicare Part A benefits and Medicare Program administration costs.
Supplementary Medical Insurance Trust Fund
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:
- Interest earned on the trust fund investments
- Funds authorized by Congress
The Supplementary Medical Insurance Trust Fund pays for:
- Medicare Part B benefits
- Medicare Part D
- Medicare Program administration costs
Medicare taxes and the Affordable Care Act
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 2019) from 1.45 percent to 2.35 percent for people with an earned annual income of more than $200,000 ($250,000 for married couples filing jointly).2
The additional tax (0.9 percent in 2018) 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 2018, 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.
Medicare taxes for the self-employed
Even if you are self-employed, the 2.9 percent Medicare tax applies.
Typically, people who are self-employed pay a self-employment tax of 15.3 percent on the first $128,400 of net income in 2019.3
The self-employed tax consists of two parts:
- 12.4 percent for Social Security
- 2.9 percent for Medicare
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.
Get the answers to your Medicare questions
If you’d like more information about Medicare, including your enrollment options, a licensed insurance agent can help.
Call TTY Users: 711 24 hours a day, 7 days a week to speak to an agent.
You can also learn more about your Medicare options by reading this helpful Medicare Enrollment Guide.
1 Internal Revenue Service. Topic No. 751 Social Security and Medicare Withholding Rates. (Jan. 4, 2018). Retrieved from www.irs.gov/taxtopics/tc75.
2 Internal Revenue Service. Questions and Answers for the Additional Medicare Tax. (July 3, 2018). Retrieved from www.irs.gov/businesses/small-businesses-self-employed/questions-and-answers-for-the-additional-medicare-tax.
3 Internal Revenue Service. Self-Employment Tax (Social Security and Medicare Taxes). (Aug. 21, 2018). Retrieved from www.irs.gov/businesses/small-businesses-self-employed/self-employment-tax-social-security-and-medicare-taxes.
