What is Medicare tax? Who pays it, and how it works

Medicare tax is an essential part of healthcare funding in the United States. If you’re an employer or self-employed, understanding how this payroll tax works can help you stay compliant and avoid unwanted surprises. So, what is the Medicare tax, and how does it affect you? Let’s break it down.

What is Medicare tax used for?

Medicare tax helps fund Medicare—a federal health insurance program that covers U.S. citizens and legal permanent residents aged 65 and older, as well as certain younger individuals with disabilities. Specifically, it supports Medicare Part A, which pays for hospital stays, hospice care, and some home health services.

How does it work for employers?

If you're an employer, Medicare tax applies to both you and your employees. You automatically deduct 1.45% from each employee’s paycheck and match it by contributing another 1.45%. This shared responsibility, totaling 2.9% of each employee's wages, helps fund the Medicare program without placing the burden solely on one party.

How does the Medicare tax rate affect self-employment income?

For self-employed individuals, Medicare tax includes both the employee and employer portions, totaling 2.9% of net earnings. Calculated under the Self-Employment Contributions Act (SECA), this tax allows for deductions of business expenses from gross income beforehand. While the full rate might seem high, self-employed individuals can deduct the employer-equivalent portion (1.45%) on their tax return, reducing their overall tax burden. Understanding your Medicare tax obligations is crucial not only for compliance but also to avoid any potential penalties down the line.

Who needs to pay Medicare tax? How is it withheld?

Most workers in the U.S. are required to pay Medicare tax, including full-time, part-time, and even temporary employees. As an employer, you are responsible for withholding the tax from your workers’ pay and matching their contributions. Managing these deductions keeps your payroll compliant and ensures you’re doing your part to support this critical healthcare program.

What counts as taxable wages?

Taxable wages cover most forms of compensation—salary, bonuses, tips, commissions, and even some fringe benefits. However, not everything counts. For instance, distributions from retirement accounts and certain employer-paid benefits, such as health insurance, may be exempt.

Is there an income limit for Medicare tax?

No—unlike Social Security tax, which caps after a certain income level, Medicare tax applies to all your earnings, no matter how high your wages go. In fact, high earners are subject to an additional Medicare tax.

The Additional Medicare Tax: What is Medicare surtax?

The Additional Medicare Tax is a 0.9% surtax that applies to individuals earning above certain thresholds. If you earn over $200,000 (or $250,000 for married couples filing jointly), you’ll pay this surtax on any income above the threshold. Employers aren’t required to match the Additional Medicare Tax—it’s entirely the employee’s responsibility.

Net investment income tax (NIIT)

Alongside the Additional Medicare Tax, some high-income individuals might also face a 3.8% tax on investment income, called the Net Investment Income Tax (NIIT). This applies to dividends, interest, and capital gains for individuals with incomes over $200,000 (or $250,000 for married couples). The NIIT doesn’t impact wages, but those who hold significant investments should plan for this extra expense.

Stay compliant with expert advice from Oyster

Managing payroll taxes can be daunting, especially when you employ a global workforce. Each country has its own set of rules, whether it’s Social Security taxes and Medicare tax rates in the U.S. or payroll regulations around the world.

Oyster cuts through the complexity, helping you stay compliant across more than 180 countries. Whether you’re navigating Medicare contributions, local tax laws, or global payroll, Oyster has the expertise and tools to ensure your business runs smoothly and efficiently.

Our platform takes care of the intricate details, freeing you up to focus on what really matters: growing your business and supporting your team. With Oyster’s solutions, you’re contributing to essential federal programs like Medicare while staying one step ahead of potential tax headaches.

Ready to streamline your global tax compliance and keep your business moving forward? Explore how Oyster’s compliance solutions can benefit your organization.

FAQ

Still have unanswered questions about Medicare tax? We can help.

What is Medicare employee tax used for?

Medicare tax funds Medicare Part A, which provides hospital insurance for those 65 and older, plus certain individuals with disabilities. Part A covers hospital stays, skilled nursing care, hospice, and some home healthcare services.

Does everyone have to pay Medicare tax?

Most U.S. workers are required to pay Medicare tax. Rare exceptions exist for members of certain religious groups and some foreign academic workers, but it’s mandatory for the vast majority.

Can you opt out of Medicare tax?

Typically, opting out isn’t an option. Only specific religious groups and foreign academic workers can be exempted under strict conditions.

At what age do you stop paying Medicare tax?

There is no age limit. If you’re still working and earning wages, you’ll continue paying Medicare tax regardless of age.

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