What is Medicare Tax?

Medicare tax is a federal payroll tax that funds Medicare Part A, the hospital insurance portion of the program. Employees pay 1.45% of wages, employers match it with another 1.45%, and self-employed people pay the full 2.9% themselves.

Unlike Social Security tax, Medicare tax has no wage cap. Social Security tax stops once your wages pass the annual wage base, but Medicare tax applies to every dollar you earn, and high earners pay an additional surtax on top.

Medicare Tax Rates

Medicare tax is one half of FICA. The other half is Social Security tax at 6.2%, which does stop at a wage base. Together they take 7.65% from a typical paycheck, matched by your employer for a combined 15.3%.

The Additional Medicare Tax

The Affordable Care Act added a 0.9% surtax on higher earners, effective from 2013. It applies to wages and self-employment income above:

Two things about these thresholds surprise people.

They are not indexed for inflation. Unlike tax brackets and contribution limits, these figures have been fixed since 2013. Every year of wage growth pulls more people over the line, which is deliberate.

Only the employee pays it. Employers do not match the additional 0.9%, so the surtax raises your marginal rate on wages above the threshold from 1.45% to 2.35%.

Your employer must begin withholding the surtax once your wages with that employer exceed $200,000, regardless of your filing status. That creates two common mismatches. A married couple each earning $150,000 has $300,000 in combined wages and owes the surtax, but neither employer withholds it, so they owe at filing. Conversely, a single filer earning $210,000 has it withheld correctly. Either way it is reconciled on Form 8959.

Self-Employment and Medicare Tax

Self-employed people pay Medicare tax through SECA rather than FICA, covering both halves at 2.9% on net self-employment income. You can deduct the employer-equivalent half as an above-the-line adjustment, which reduces your adjusted gross income but not the self-employment tax itself.

The additional 0.9% applies to self-employment income above the same thresholds and is not deductible.

Medicare Tax vs. the Net Investment Income Tax

These two get confused because they share the same income thresholds and both help fund Medicare, but they are different taxes.

Medicare tax applies to earned income: wages and self-employment income. The Net Investment Income Tax (NIIT) is a separate 3.8% levy on investment income, including interest, dividends, capital gains, and passive rental income, for taxpayers above $200,000 single or $250,000 married filing jointly.

A retiree living entirely on portfolio withdrawals and Social Security pays no Medicare tax at all, because none of that is earned income, but may owe NIIT on the investment portion. Someone with a $400,000 salary and no investments owes the Medicare surtax but no NIIT.

The two are measured against different things, which is where people go wrong. The Additional Medicare Tax is tested against wages and self-employment income; NIIT is tested against modified adjusted gross income. So a Roth conversion raises MAGI and can pull investment income into NIIT range even though the conversion is not itself investment income, while having no effect at all on the Medicare surtax. Neither threshold is indexed. Modeling how conversions, capital gains, and wage income stack in the same year in ProjectionLab’s tax analytics shows where those thresholds actually bite.

Frequently Asked Questions

What is the Medicare tax rate? 1.45% for employees, matched by employers for 2.9% total. Self-employed people pay the full 2.9%. High earners pay an additional 0.9% above $200,000 (single) or $250,000 (married filing jointly).

Is there a wage limit on Medicare tax? No. Medicare tax applies to all earned income with no cap. Social Security tax is the one that stops at an annual wage base.

Who pays the additional Medicare tax? Employees and self-employed people with income above $200,000 single, $250,000 married filing jointly, or $125,000 married filing separately. Employers do not match it. The thresholds are not adjusted for inflation.

Do retirees pay Medicare tax? Not on Social Security benefits, pensions, or portfolio withdrawals, since Medicare tax applies only to earned income. A retiree with wages or self-employment income still pays it at any age.

Can I deduct Medicare tax? Employees cannot. Self-employed people can deduct the employer-equivalent half of their self-employment tax as an adjustment to income, but not the additional 0.9% surtax.

Is Medicare tax the same as Medicare premiums? No. Medicare tax is a payroll tax you pay while working. Medicare premiums are what you pay for coverage once enrolled, and Part B and Part D premiums are income-adjusted through IRMAA based on your income from two years prior.