What Is the Medicare Tax?

You’ve probably noticed that you have money taken out of your paycheck for Medicare if you look at your pay stub. Medicare is a national system that provides healthcare for millions of eligible residents in the United States. People on Medicare are typically age 65 or older, although younger people may qualify if they have certain diseases or disabilities that prevent them from working. Funding for Medicare comes from the premiums that recipients pay for their coverage, as well as from our taxes.

Why Do I Pay Medicare Tax?

The Medicare taxes and Social Security tax are mandated by the Federal Insurance Contributions Act (FICA). FICA taxes are deducted from your wages and other income.

Paying the Medicare tax helps to fund the program, and if you pay it for at least 40 quarters (ten years), you’ll be able to receive Medicare Part A for free in the future. Medicare Part A covers inpatient medical services, and is one of the pieces that makes up Medicare. People that aren’t eligible for a premium-free Part A can pay up to $458 a month for it in 2020.

Who Pays the Medicare Tax?

Any employee or business in the United States will contribute to the Medicare tax. This includes people who are self-employed and non-residents, and the tax applies to all eligible income. Eligible income includes your wages, tips, and bonuses. Some fringe benefits are subject to the tax as well, such as paid time off or access to a company car for personal use.

What Is the Medicare Tax Rate?

The Medicare tax rate for 2020 is 1.45% of your income, and your employer pays a matching 1.45%. Combined with the 12.4% tax rate for Social Security, the total FICA tax rate is 15.3%.

Unlike the Social Security tax, which has a cap on the amount you can be taxed each year, there is no limit to the Medicare tax. In fact, if your income is above a certain level, you may have to pay the Additional Medicare Tax.

You may be responsible for Additional Medicare Taxes if any of the following situations apply to you.

You are:

  • Single, and your filed income is $200,000 or above
  • Married, filing independently, and your income is $125,000 or above
  • Married, filing jointly, and your combined incomes are $250,000 or above

If you fall into one of those categories, you’re required to pay an additional .9%. Your employer, however, isn’t responsible for the extra cost.

Do I Have to Pay the Medicare Tax on My Investments?

Some, but not all earnings from investments will be subject to the Medicare tax.

A few of the types of investments that you may have to pay tax on are:

  • Rental income
  • Dividends
  • Net capital gains from the sales of investments

Nontaxable investments and benefits include:

  • Withdrawals made from a retirement plan such as a Traditional IRA, Roth IRA, or 401(k)
  • Veteran’s benefits
  • Social Security benefits

The Medicare tax helps fund the healthcare program that’s vital to millions of Americans. When you pay the Medicare tax, it helps fund their coverage and reduce the amount of money that you’ll have to pay when you join the program.

Nothing on this website should ever be used as a substitute for professional medical advice. You should always consult with your medical provider regarding diagnosis or treatment for a health condition, including decisions about the correct medication for your condition, as well as prior to undertaking any specific exercise or dietary routine.

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