What Is Medicare Tax?

Medicare tax is used to fund hospital costs, hospice care, and nursing home expenses for elderly and disabled individuals. On top of that, there are two additional Medicare taxes that apply to certain high earners.

In this article, we will discuss Medicare tax, how it works, how you pay it, how much it costs, what it is used for, its additional surtaxes, and much more.

What Is Medicare Tax?

Medicare tax, which is also called hospital insurance tax, is a federal employment tax that all Americans pay to fund Medicare Part A.
Similar to Social Security tax, Medicare tax is taken out of an employee’s pay or paid as a self-employment tax.

However, unlike social security, Medicare is also financed through:

• Monthly Premiums
• Income taxes paid on social security benefits
• Interest earned on social security trust-fund investments
• Funds authorized by Congress

This means that Medicare isn’t entirely dependent on the amount of FICA payroll taxes that people pay.

What is FICA?
FICA tax is a United States federal payroll tax and it is deducted from each paycheck.
Your nine-digit Social Security (SS) number helps to accurately record your covered wages or self-employment. As you work and pay FICA taxes, you earn credits for SS benefits.

What Is Medicare Part A?

Medicare Part A covers hospital insurance for people who are 65 or older and who have specific disabilities or illnesses, such as amyotrophic lateral sclerosis (ALS), also known as Lou Gehrig’s disease, or end-stage renal disease (ESRD).

Medicare Part A pays for:

• Hospital visits
• Hospice care
• Nursing home care
• Specified home health care

How Does Medicare Tax Work?

Medicare tax is a two-part tax which means that you and your employer both make contributions toward it. The amount you pay is based on your taxable wages and is deducted automatically each month through your employer’s payroll system.

What Are Medicare Taxable Wages?
Medicare taxable wage refers to the amount on which Medicare tax is paid. It is calculated as the employee’s gross earnings minus non-taxable items, without any maximum on gross wages.

You can calculate this by taking your gross pay (how much money you earn before tax) and subtracting pretax health care deductions from your pay, such as:

• Medical insurance
• Dental
• Vision
• Health savings accounts

The Internal Revenue Service (IRS) Employer’s Tax Guide states that your employer must collect the tax, and your employer then sends both their own and your tax contributions to the IRS through regular electronic deposits.

The process works slightly differently for self-employed workers because they are responsible for the full amount. However, self-employed workers are required to pay their Medicare tax as a part of their self-employment tax.

Instead of being taken out of a paycheck, self-employment tax is paid through quarterly-estimated tax payments.