What Is Medicare Tax?

There are actually three Medicare taxes, but most individuals only pay one

Updated on October 17, 2022

Fact checked by J.R. Duren

Older woman sitting on an exam table talking to doctor — Photo:
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The U.S. government imposes a flat rate Medicare tax of 2.9% on all wages received by employees, as well as on business or farming income earned by self-employed individuals. "Flat rate" in this case means that everyone pays that same 2.9% regardless of how much they earn. But there are two other Medicare taxes that may apply to you depending on the sources and amount of your income.

Key Takeaways

Medicare tax is a 2,9% levy on all earnings. It shows up on your pay stub as part of FICA taxes withheld by your employer.
Highly-paid employees may be subject to an additional Medicare tax of 0.9%, the Alternative Medicare Tax, which is levied on incomes above certain thresholds.
The third Medicare tax is the Net Investment Income Tax, which is 3.8% of net income from investments, or reported income above the Alternative Medicare Tax thresholds that includes investment income.

The History of the Medicare Program

The Medicare program and its corresponding tax have been around since 1965, when President Lyndon Johnson signed the Medicare and Medicaid Act, also known as the Social Security Amendments, into law.

The program was initially designed to provide health care benefits to senior citizens and to low-income individuals, but the Social Security Amendment of 1972 expanded the program to cover people with permanent disabilities and end-stage renal disease.

More benefits have been added over the years, including coverage of prescription drugs.

The Medicare Hospital Insurance Tax

Unlike the Social Security tax—the other component of the Federal Insurance Contributions Act, or FICA, taxes—all of your wages and business earnings are subject to at least the 2.9% Medicare hospital insurance program tax. Social Security has an annual wage limit, so you pay the 6.2% tax only on income up to a certain amount: $160,200 in 2023. Income after that is not subject to Social Security tax (known officially as Old-Age, Survivors, and Disability Insurance [OSADI]).

Half the Medicare tax is paid by employees through payroll deductions, and half is paid by their employers. In other words, 1.45% comes out of your pay and your employer then matches that, paying an additional 1.45% on your behalf, for a total of 2.9%.

Medicare as Part of Self-Employment Tax

You'll take something of a double hit on the Medicare tax if you're self-employed. You must pay both halves of the tax because you're the employee and the employer. Together with also paying both halves of the Social Security tax, this obligation is known as the self-employment tax and amounts to 15.3% of your income.

The IRS does throw self-employed individuals a bit of a bone. You're allowed to deduct half your self-employment tax as an adjustment to income on your Form 1040 tax return. Unlike many other deductions, this one reduces your adjusted gross income (AGI), which is a good thing. Many tax breaks depend on your AGI falling below certain limits.

Note

Calculate the amount of your deduction for half the self-employment tax on Schedule SE, and submit the schedule to the IRS along with your tax return.

The Additional Medicare Tax

Some high-income taxpayers must pay an extra Medicare tax over and above the 2.9% rate.

The Additional Medicare Tax (AMT) was added by the Affordable Care Act (ACA) in November 2013. The ACA increased the Medicare tax to 3.8% for taxpayers whose incomes are over a certain threshold based on their filing status.

Additional Medicare Tax Thresholds
Filing Status	Wages and/or Self-Employed Income in Excess of
Married Filing Jointly	$250,000
Single/Head of Household/ Qualifying Widow(er)	$200,000
Married Filing Separately	$125,000

Employers don't have to match the AMT. The employee must pay the entire 0.9%.

Payroll Withholding for the AMT

Employers might not always be aware that an employee is subject to withholding for the AMT. For example, if an employee works more than one job, their incomes from Employer A and Employer B might both fall under the threshold individually, so neither employer would withhold this tax.

Note

If an employer fails to withhold AMT amounts, you're still liable for the AMT. If you are subject to the AMT, you must complete and file Form 8959 with your tax return. Also, you can make estimated tax payments that include the AMT amount you think you'll owe.

Any shortfall to withholding must be paid by the taxpayer at tax time. Employers can be subject to penalties and interest for not withholding the AMT, even if the oversight was due to understandable circumstances.

The Net Investment Income Tax

There was a time when investment income wasn't subject to the Medicare tax, but that changed with the Affordable Care Act as well.

A Medicare contribution tax of 3.8% now additionally applies to "unearned income"—that which is received from investments, such as interest or dividends, rather than from wages or salaries paid in compensation for labor or self-employment income. This tax is called the Net Investment Income Tax (NIIT).

Tax-exempt interest income, such as from an investment in municipal bonds, is exempt from the NIIT, as are withdrawals from certain retirement plans and certain life insurance proceeds. But required minimum distributions taken from traditional IRAs, 401(k) plans, or 403(b) plans are included in your modified adjusted gross income (MAGI), and this can be an important distinction.

The 3.8% rate applies to the lesser of your net investment income or the amount by which your MAGI exceeds a threshold amount. For 2023, the threshold amounts are the same as for the AMT (see the table above).

The Bottom Line

Many taxpayers only have to deal with that first 2.9% flat rate Medicare tax, but you could end up paying more than this percentage to Medicare if you're a high earner with investment income.

Frequently Asked Questions (FAQs)

Does everyone pay a Medicare tax?

All employees in the United States and all self-employed workers must pay Medicare and Social Security tax. Employers must withhold the employee's share (and contribute their own share) of the tax. There is no base wage limit to Medicare tax—all wages are subject to the tax.

Who is exempt from paying Medicare tax?

In general all workers, whether citizens or aliens, must pay Social Security and Medicare taxes (FICA). However, some nonresident aliens working in the U.S. on certain visas are exempt. These certain some teachers, professors, scholars, au pairs, summer camp workers, and some agricultural workers. Others may be exempt due to international "totalization agreements" that seek to avoid double taxation.

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Sources

The Balance uses only high-quality sources, including peer-reviewed studies, to support the facts within our articles. Read our editorial process to learn more about how we fact-check and keep our content accurate, reliable, and trustworthy.

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