Medicare tax rates are an important part of the Medicare program. The taxes help to fund the program and keep it running. In this blog post, we will discuss how the Medicare tax rates work and how to calculate them. We will also provide a few examples to help illustrate how the calculations are done.
How Does it Work?
Medicare tax is deducted automatically from your paycheck to pay for Medicare Part A. This will provides hospital insurance to seniors and people with disabilities. The total tax amount is split between employers and employees, each paying 1.45% of the employee’s income. High-income earners pay a slightly higher percentage and those who are self-employed pay the tax with their quarterly filings.
Medicare tax is a two-part tax where you pay a portion as an automatic deduction from your paycheck, and your employer pays the other part. The tax is based on “Medicare taxable wages”. This is a calculation that uses your gross pay and subtracts pretax health care deductions. For example: medical insurance, dental, vision, or health savings accounts.
Your employer is required to collect the tax, and it sends both the employee and employer version to the IRS through regular electronic deposits.
What is The Meaning of Medicare Tax?
Medicare tax is a federal payroll tax that pays for a portion of Medicare. Because of the $284 billion paid in Medicare taxable wages each year, about 63 million seniors and people with disabilities have access to hospital care, skilled nursing, and hospice.
Generally, all U.S.-based workers must pay Medicare tax on their wages. The tax is grouped under the Federal Insurance Contributions Act (FICA). When looking at your paycheck, you may see the Medicare tax combined with the Social Security tax as a single deduction for FICA.
The Medicare tax was established in 1966 to solve a healthcare problem. For many seniors, income declines and health care needs to increase after retirement. But before Medicare, the cost of insurance got too high to manage, and some retirees’ policies were canceled due to their age.
The Medicare program has many components, but a key change at the time was the working population would pay a new Medicare tax to support Medicare hospital insurance.
Examples of Medicare Tax
For example, an individual with an annual salary of $50,000 would have a 1.45% Medicare tax deducted from their paycheck. That’s about $60 each month. The employer would pay an additional $60 each month on their behalf, totaling $120 contributed to Medicare.
Those who are self-employed pay Medicare taxable wages as a part of the self-employment tax. Rather than being deducted from a paycheck, the money is paid through quarterly estimated tax payments.
The Medicare tax rate has remained unchanged since 1986. But in 2013, an Additional Medicare Tax for high-income earners was implemented as part of the Affordable Care Act.
What is it Used For?
Firstly, The Medicare tax pays for Medicare Part A, providing health insurance for those age 65 and older and people with disabilities or certain medical issues. Medicare Part A, also known as hospital insurance, covers health care costs such as inpatient hospital stays, skilled nursing care, hospice and some home health services.
The tax collected for Medicare accounts for 88% of the total revenue for Medicare Part A.
Total revenue for Medicare Part A
- Medicare payroll tax: 88% ($284 billion)
- Other funding from taxes, premiums, transfers and interest: 12% ($39 billion)
All revenue for Medicare Part A goes into the Hospital Insurance (HI) trust fund, which is slowly being depleted because the expenses for associated health services have generally been higher than the fund’s annual revenue. In 2021, the Congressional Budget Office (CBO) projected the trust fund will be fully depleted by 2026.
What is the Current Tax Rate?
In 2022, the Medicare tax rates is 1.45%. This is the amount you’ll see come out of your paycheck, and it’s matched with an additional 1.45% contribution from your employer for a total of 2.9% contributed on your behalf.
2022 Medicare tax rate you pay 1.45%Your employer pays1.45%
If you’re a high-income earner, you’ll pay an Additional Medicare Tax withholding of 0.9% on any wages that exceed the annual earnings threshold. In 2022, this threshold is $200,000 for individuals and $250,000 for those who file jointly.
We hope you learned a little about how Medicare is collected and calculated. If you have any questions, please do not hesitate to reach out.