Medicare is the U.S. government’s health insurance program for folks who’ve reached age 65, as well as certain younger people with disabilities. The program, along with Social Security, is funded by payroll withholdings under the Federal Insurance Contributions Act (FICA), which is separate and distinct from income taxes.
Although Medicare and Social Security are both funded through FICA taxes, the programs have different tax rates. In addition, all salaries are subject to Medicare tax, whereas the top salary subject to Social Security tax is capped.
Medicare and Social Security Taxes
The Medicare tax rate is 2.9 percent of your salary. The cost is split evenly with your employer – you both pay 1.45 percent each. The Social Security tax rate is 12.4 percent, split 6.2 percent each for employer and employee. The maximum wage subject to Social Security tax (known as the wage base limit) in 2021 is $142,800.
Your Medicare and Social Security taxes are reported on your paycheck stub on the line for FICA taxes. Thus, your contribution to FICA is (6.2 + 1.45), or 7.65 percent of your wages. Your employer also pays FICA tax of 7.65 percent on your wages, making the total FICA tax rate collected by the federal government equal to (7.65 + 7.65), or 15.3 percent.
For example, if you earn $1,000 in wages for the week, your paycheck will contain a FICA tax withholding of $76.50, composed of $14.50 for Medicare and $62 for Social Security. Your employer puts aside another $76.60 for its half of the total FICA tax.
Wage-earners cannot deduct Medicare and Social Security taxes from their taxable income.
Self-Employed Medicare Taxes
If you earn self-employed income, you must pay Medicare and Social Security self-employment tax on net earnings. The tax rates and income cap are the same as those for wage earners. Self-employed persons must pay both the employer and employee portions of the tax. However, they can deduct the 7.65 percent employer-equivalent portion of the self-employment tax.
The tax deduction creates a chicken and egg situation. On the one hand, your net earnings determine the amount of self-employment tax you must pay and the size of your deduction. But on the other hand, the tax deduction reduces your net earnings.
The IRS solves this dilemma with [Schedule SE](https://www.irs.gov/forms-pubs/about-schedule-se-form-1040#:~:text=Use%20Schedule%20SE%20(Form%201040,net%20earnings%20from%20self%2Demployment.&text=This%20tax%20applies%20no%20matter,social%20security%20or%20Medicare%20benefits.), which steps you through the process of calculating your self-employment tax. You file Schedule SE with Form 1040 or Form 1040-SR.
Medicare Surcharge for High Incomes
One other part of the Medicare tax picture is the additional Medicare tax of 0.9 percent on taxpayers who earn the following threshold amounts:
- Married filing jointly: $250,000
- Married filing separate: $125,000
- Single: $200,000
- Head of household (with qualifying person): $200,000
- Qualifying widow(er) with dependent child: $200,000
The additional Medicare tax kicks in when your wages, compensation and/or self-employment income (together with that of your spouse if filing a joint return) exceeds the appropriate threshold. These thresholds are not indexed to inflation.
Medicare Surcharge Example
For example, suppose you are a single filer and earn a $500,000 salary for the year. Your total Medicare tax would be composed of:
- 1.45 percent on $500,000, or $7,250
- 0.9 percent on ($500,000 - $200,000), or $2,700
Your total Medicare tax bill for the year is ($7,250 + $2,700), or $9,950.
Net Investment Income Tax
Net investment income tax (NIIT) is an additional income tax charged on certain net income of individuals, trusts and estates. NIIT is triggered by the same income thresholds as used for figuring additional Medicare tax. However, NIIT applies only to investment income, such as interest, dividends and capital gains. Medicare tax does not apply to net investment income.
- Medicare.gov: What’s Medicare?
- Social Security: Contribution and Benefit Base
- IRS: About Schedule SE (Form 1040 or 1040-SR), Self-Employment Tax
- IRS: Questions and Answers for the Additional Medicare Tax
- IRS: Questions and Answers on the Net Investment Income Tax
- Social Security Administration. "What Are FICA and SECA Taxes?" Accessed April 1, 2020.
- Social Security Administration. "2021 SOCIAL SECURITY CHANGES." Accessed Oct. 15, 2020.
- Internal Revenue Service. "Topic No. 751 Social Security and Medicare Withholding Rates." Accessed Nov. 5, 2020.
- Social Security Administration. "Supplemental Security Income Overview." Accessed April 1, 2020.
Eric Bank is a senior business, finance and real estate writer, freelancing since 2002. He has written thousands of articles about business, finance, insurance, real estate, investing, annuities, taxes, credit repair, accounting and student loans. Eric writes articles, blogs and SEO-friendly website content for dozens of clients worldwide, including get.com, badcredit.org and valuepenguin.com. Eric holds two Master's Degrees -- in Business Administration and in Finance. His website is ericbank.com.