What Is Medicare Tax?

Medicare tax is a federal payroll tax in the United States that helps fund the Medicare program, which provides health insurance primarily to individuals aged 65 and older, as well as certain younger people with disabilities or qualifying medical conditions. The tax is mandatory and applies to most employees and self-employed individuals who earn income in the U.S. It is collected by the Internal Revenue Service (IRS) and deposited into the Hospital Insurance Trust Fund, which finances Medicare Part A, covering inpatient hospital care, skilled nursing facility care, hospice, and some home health services.

Who Pays the Medicare Tax

Both employees and employers are responsible for paying the Medicare tax. For most wage earners, the tax rate is split evenly between the employee and the employer. As of current law, the Medicare tax rate is 1.45% for employees and 1.45% for employers, totaling 2.9% for each dollar of earned wages. This applies to all earned income, with no cap or wage limit—unlike Social Security tax, which has an annual wage ceiling.

Self-employed individuals must pay the full 2.9% on their net earnings, as they are considered both the employee and employer under tax law. However, they may deduct the “employer-equivalent” portion (1.45%) when calculating their adjusted gross income for income tax purposes.

Additional Medicare Tax for High Earners

The Affordable Care Act introduced an additional Medicare tax, effective from 2013, targeting high-income individuals. This surtax, known as the Additional Medicare Tax, is 0.9% and applies only to employee wages and self-employment income above specific thresholds. Unlike the standard Medicare tax, the additional tax is paid solely by the employee or self-employed individual. Employers are not required to match it.

The income thresholds for the Additional Medicare Tax are:

• $200,000 for single filers
• $250,000 for married couples filing jointly
• $125,000 for married individuals filing separately

For example, if a single filer earns $250,000 in wages in a calendar year, the first $200,000 is subject to the regular 1.45% Medicare tax. The remaining $50,000 is subject to both the standard Medicare tax and the additional 0.9% surtax.

Employers are obligated to withhold the additional 0.9% from wages paid in excess of $200,000 per employee, regardless of the employee’s tax filing status or household income. If the employee ultimately owes less or more than what was withheld, the discrepancy is settled when the employee files their income tax return.

Medicare Tax on Unearned Income

It’s important to note that traditional Medicare tax does not apply to unearned income such as interest, dividends, capital gains, rental income, or retirement distributions. However, high-income taxpayers may be subject to a related tax called the Net Investment Income Tax (NIIT), which is a separate 3.8% tax on certain types of unearned income.

Although related in purpose (helping fund Medicare), the NIIT is not part of the Medicare payroll tax system. Instead, it is reported and paid through the individual income tax return using IRS Form 8960.

Collection and Reporting

For employees, Medicare tax is withheld automatically from wages by employers as part of the payroll process. Employers must report the amount withheld on Form W-2, and both the employee and employer amounts are reported on IRS Form 941 (Employer's Quarterly Federal Tax Return).

Self-employed individuals calculate and report their Medicare tax liability as part of their annual tax filing using Schedule SE (Self-Employment Tax), which is filed along with IRS Form 1040. The self-employment Medicare tax is based on net earnings from self-employment activities.

In the case of overpayment—such as if a taxpayer had multiple employers and total Medicare tax withheld exceeded the required amount—they may claim a refund when filing their income tax return. However, employers are not required to adjust for overpayments due to multiple jobs.

Purpose and Long-Term Role

The Medicare tax plays a critical role in funding a major component of the U.S. health care system for older adults and certain disabled individuals. Medicare Part A is largely financed through this tax, making it one of the few parts of the Medicare program that is funded primarily through dedicated payroll taxes rather than general federal revenues.

Because Medicare benefits are guaranteed to eligible individuals regardless of how much they paid in taxes, the Medicare tax system operates more as a social insurance model rather than a strictly contributory one. The long-term sustainability of the program continues to be a subject of discussion among policymakers, especially as the population ages and the demand for Medicare services increases.

The Bottom Line

Medicare tax is a mandatory federal payroll tax designed to support the funding of Medicare Part A. It applies to both earned wages and self-employment income, with no income cap, and includes an additional tax for high-income individuals. The tax is an essential component of the Medicare financing structure, helping ensure access to hospital and related health care services for millions of Americans. Understanding how Medicare tax is calculated, who is responsible for paying it, and how it interacts with other tax obligations is a key part of personal and business financial planning.