Medicare Tax Rate: Everything You Need to Know

The Medicare tax is a payroll tax that applies to all of an employee's earned income and is designed to support health coverage when a person becomes eligible for Medicare. Medicare tax is an automatic deduction from your paycheck every month. It's a tax on earnings, including:

  • Wages
  • Tips
  • Self-employment earnings over a certain level
  • Certain RRTA, or Railroad Retirement Tax Act, benefits

Everyone who works in the United States is required to pay Medicare tax, and there's no minimum income limit that must be met. Most people expect Medicare to be there for them when they retire. This program provides basic medical coverage for Americans age 65 and older.

Who Pays Medicare Tax?

In general, all employees pay the Medicare tax if they work in the U.S. The residency status or citizenship of the employer or employee do not matter. In some situations, you might have to pay Medicare tax on wages earned outside of the U.S., but your employer should be able to tell you if this applies to you. You'll have to contact your employer if Medicare taxes are erroneously withheld from your wages. The IRS determines the Medicare tax rate, and the rate can change.

If you're an employee, the Medicare tax is one of the federal taxes that will be withheld from your wages; if you're self-employed, you're responsible for paying these taxes yourself. Self-employed individuals pay a higher tax rate because they cover the employee portion as well as the part that's normally paid by an employer; however, these individuals are able to deduct half of the tax from their personal income tax.

About Additional Medicare Tax

At the beginning of 2013, a Medicare surtax went into effect; this was implemented by The Affordable Care Act (2010). This surtax expanded the Medicare payroll tax so that it now includes the Additional Medicare Tax. This tax increase mandates that higher wage earners pay added tax (0.9 percent) on earned income. The types of wages that are subject to the Medicare tax could be subject to the Additional Medicare Tax, as well.

A person owes Additional Medicare Tax on:

  • Compensation
  • Self-employment income
  • All cumulative wages

You're not subject to the tax until the total amount of these categories exceeds your filing status threshold.

Be careful not to confuse Additional Medicare Tax with the Alternative Minimum Tax on high incomes; the latter tax isn't mandatory for withholding.

Who's Subject to Additional Medicare Tax?

You're required to pay this tax if your compensation, individual wages, and self-employment income (or combined income if you are married and you file a joint tax return with your spouse) all exceed maximum amounts of:

  • $250,000 – married and filing jointly
  • $125,000 – married and filing separately
  • $200,000 – qualifying widow(er) with dependent children; single; or head of household

Payroll Taxes and Higher Incomes

The FICA tax consists of combined Medicare and Social Security payroll taxes. FICA stands for Federal Insurance Contributions Act. FICA tax rates are set; in order for them to change, new tax legislation would have to be enacted.

The maximum amount of earnings that is subject to Social Security tax climbed to $127,200 in 2017 and is now $128,400 in 2018. The 2017 rate was a percentage increase of 7.3 percent from 2015. In 2015 and 2016, the maximum amount of earnings subject to the tax was $118,500, so it rose by $8,700. About 12 million more people will pay more tax due to the increase in the maximum taxable amount. This is out of the approximately 173 million employees who paid Social Security taxes in 2017. The adjustment took effect at the beginning of the year, and it's based on the government estimate of recent real wage growth.

This jump in 2017 in the taxable-earnings cap was the biggest one-year jump since 1983. Part of the reason for such a big increase was that federal law held the taxable maximum amount the same in 2016. It didn't change because there was no cost-of-living increase in Social Security benefits. A 12.4 percent tax on wages includes half (6.2 percent) paid by employees and half paid by employers. The total 12.4 percent finances Social Security.

By the beginning of every year, employers in the U.S. have to adjust their payroll systems. This change is made to account for a higher wage base subject to taxes. Employers should notify affected employees that more of their wages will then be subject to payroll withholding. If you earn more than the prior maximum of $118,500, you'll have a decrease in net take-home earnings unless you get a yearly raise that makes up for the additional payroll tax.

A Small Rise in Benefit Payments

In 2017, for over 65 million people in the U.S., their monthly Supplemental Security Income (SSI) and Social Security benefits rose only 0.3 percent. However, the 2018 benefits increased by 2 percent — a welcome change for beneficiaries.

For employees who retire at their full retirement age, the maximum amount of Social Security benefits is $2,788 for 2018 each month. The amount for 2017 was $2,687 each month, which increased from the amount in 2016 of $2,639. The Social Security Administration, or SSA, estimated that, on average, the monthly Social Security benefits in 2017 for retired employees was around $1,360, only a $5 increase from the average payment in 2016 of $1,355. It's a very small increase, but recipients of SSI didn't have a cost-of-living adjustment in 2016 because of the low inflation rate. The projected average for 2018 is around $1,404 per month, which includes the 2 percent cost of living increase.

You can find information about the 2018 premium increases in Medicare online at www.Medicare.gov when the information is released. In 2017, changes for that year were made public in November.

For many people who receive SSI benefits, an increase in their Social Security will probably be offset by increased Medicare premiums. These premiums could be even higher for people covered by Medicare Part B if they're still working and have therefore delayed receiving Social Security benefits.

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