The Medicare program is funded in part through payroll taxes and, starting in 2013, taxes on investment income. If you are an employee in the United States, you’ll pay Medicare taxes throughout your working career.
Medicare payroll taxes
All earned income is subject to Medicare taxes. This tax applies no matter how much you make.
The Medicare payroll tax rate is 2.9%. If you’re working for an employer, you’ll pay a 1.45% Medicare tax on your income. Your employer will pay the other 1.45% Medicare tax. This tax is automatically withheld from your paycheck. If you’re self-employed, you’ll owe a 2.9% tax on your earnings.
People who have worked at least 10 years (or 40 quarters) will have paid enough Medicare taxes to get Medicare Part A without paying a premium. If you haven’t worked enough quarters, you may have to pay a monthly premium for Medicare Part A. Note that Medicare Part B always comes with a monthly premium.
You won’t be taxed for your Medicare benefits, even if the benefits you receive over your lifetime are higher than what you paid in Medicare taxes. However, you may have to pay income taxes on your Social Security retirement benefits if your income is above a certain level.
Additional Medicare Tax
Some people are taxed an additional 0.9% if they make above a certain limit. Known as the Additional Medicare Tax, this tax applies to earned income and wages starting after December 31, 2012.
The extra 0.9% tax applies if you make above $200,000 for individuals; $250,000 for married couples filing jointly; and $125,000 for married couples filing separately. Your employer is required to automatically withhold the 0.9% tax for quarters where you make above the threshold limits. These limits may change from year to year. To see the most current income thresholds, visit IRS.gov .
The Additional Medicare Tax also applies to people who pay Railroad Retirement Board taxes.
Medicare tax on
net investment income
Starting in 2013, you may need to pay a 3.8% Medicare tax for part of or all of your net investment income. Net investment income includes money made from:
- Capital gains
- Rental income
Net investment income doesn’t include earned income or money withdrawn from a retirement account, such as an IRA or 401(k).
This 3.8% tax only applies if your modified adjusted gross income is above certain levels. Your modified adjusted gross income is your cumulative income, which includes both earned wages and net investment income. In 2014, this threshold is $200,000 if you’re filling individually, $250,000 for married couples filing jointly, and $125,000 for married couples filing separately.
If your modified adjusted gross income is above the threshold levels, the 3.8% tax is applied to either your net investment income or to the amount of your modified adjusted gross income that exceeds the threshold limit, whichever is less.
For example, let’s say your modified adjusted gross income is $260,000. Of that $260,000, $150,000 is earned income and $110,000 is net investment income. Because you’re above the $200,000 threshold, you’re subject to the 3.8% tax. You’ll pay this tax on the $60,000 of your modified adjusted gross income that goes over the threshold limit, since this is amount is less than your net investment income ($110,000).
In another example, let’s say your modified adjusted gross income is $350,000, of which $300,000 is earned wages and $50,000 is net investment income. You’ll pay the 3.8% tax on your net investment income, since this amount is less than the portion of your modified adjusted gross income that exceeds the threshold ($150,000).
The threshold limits may change from year to year. For the most current threshold levels, visit the IRS website .
For more information, see Fidelity Investments, “The Medicare taxes and you .”
Medicare has neither reviewed nor endorsed this information.