Part of the reason the government has enough money to offer Medicare in the first place is that working adults have their Medicare taxes withheld from their paychecks throughout their working years.

It may be annoying not to have control over that money in the present, but being eligible to enroll in a fairly comprehensive health plan once you are no longer earning your income is worth it for most people.

Below, we will explain how this tax structure works as well as how it applies to you, your wages, and your Medicare.

Medicare Tax Rate for Employees

For the most part, when it comes to your Medicare taxes, only your earned income receives taxation — not things like property or inheritance. Investment income may receive taxation if your net income exceeds a certain amount. For the average working individual, Medicare taxes break down like this:

  • The Medicare Tax Rate is 1.45%
  • Your Social Security Administration Tax Rate is 6.2%
  • FICA (the Medicare tax rate plus the Social Security Administration tax rate) is 7.65%

In almost all situations where you report your income with a W-2 each tax season, your FICA taxes will be automatically withheld from your paycheck and go straight into the government’s coffers.

This helps alleviate your burden when it comes time to file and pay your taxes each year. And when you retire, that money will help go towards paying for the healthcare you need to live a happy, optimally healthy life during your golden years.

Medicare Tax Limits

Most beneficiaries will be relieved to know that when it comes to Medicare taxes — especially FICA taxes — you will only have to pay a certain amount each year. For example, employees making $200,000 or less will face a maximum Social Security tax burden of $8,239.80.

After that, employees have to pay an additional 0.9% Medicare tax on every dollar they earn after they reach that $200,000 threshold (however, this extra tax does not apply to employers).

For those receiving Social Security benefits, you may face a situation where your adjusted gross income is so high that you have to pay taxes on the Social Security benefit income you receive.

In such a case, your maximum tax burden is capped at $8,537.40 on a maximum of your first $137,700 of income. Nothing you earn above that $137,700 amount will be taxed.

Alternatively, you can elect to have those taxes withheld from your monthly SSA check so that you don’t have to pay them later when you file your taxes.

Medicare Tax Rate for Self-Employed Individuals

The Medicare tax rate is substantially different for people who are self-employed. Basically, almost all of the Medicare taxes you pay are doubled in order to compensate for the fact that you don’t have an employer who is sharing that tax burden with you.

It’s the unfortunate price you have to pay for exercising freedom of choice when it comes to controlling your labor, your daily schedule, and getting fairly compensated for the time and effort you put into your work.

When it comes to hourly or salary employees who are working for an employer, the tax burden gets split 50-50 between employers and their employees.

Since a self-employed individual is acting as both employer and employee, this means that your tax burden is doubled. So you can expect to pay:

  • 2.9% of your untaxed income for the Medicare tax
  • 12.4% of your untaxed income for the Social Security tax
  • Therefore, your overall FICA tax burden is 15.3%

If you want to reduce some of this tax burden, make sure you find yourself a good CPA (Certified Public Accountant). They can help find the deductions you need to file in order to reduce the overall tax burden you pay to the IRS each year (or each quarter, depending on how you manage your business).

FAQs

Are there Medicare taxes associated with unearned sources of income?

Yes, its name is the Net Investment Income tax. This tax rate is 3.8% and there is no cap based on your total amount of investment income, unlike the caps for earned income.

When can I stop paying Medicare taxes?

As soon as you stop working for a living. Whether you’re enrolled in Medicare or not, as long as you are collecting earned income from working a job, you will have to pay FICA and other associated Medicare taxes.

Are there Medicare taxes that don’t have caps/wage limits?

Yes. The 1.45% Medicare tax applies to every dollar of wages you earn from working, no matter how much money you make. The Net Investment Income tax works in a similar fashion. If you earn a certain level of net income, every dollar of investment income beyond it is taxed at 3.8%. Those thresholds are:

  • $250,000 for those married filing jointly
  • $125,000 for married beneficiaries filing separately
  • $200,000 for people who are single or who are the head of a household living with a qualifying person
  • $250,000 for a qualifying widow or widower who is also taking care of a dependent child

Getting Help With Your Medigap Coverage

Once you figure out your tax burden, you should also review your Medicare benefits. This is to determine if you would receive real value by enrolling in a Medicare Supplemental (Medigap) plan.

These plans can close the holes in your health coverage and our licensed insurance agents can help. Their encyclopedic knowledge of everything related to Medicare can assist you in making educated decisions regarding your Supplemental plan.

The agents are available every day and it’s free to speak with them. Give them a call today or fill out our easy and convenient online rate form to get the best rates in your area.

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by Lindsay Malzone, Lindsay Malzone is the Medicare expert for Medigap.com. She's been contributing to many well-known publications as an industry expert since 2017. Her passion is educating Medicare beneficiaries on all their supplemental Medicare options so they can make an informed decision on their healthcare coverage.