For the federal government to offer Medicare to 67.4 million individuals per thirty days, it has to get the cash from someplace.
That funding, totaling $1 trillion in 2023, comes from a mix of presidency contributions, payroll taxes, and month-to-month premiums paid by Medicare beneficiaries. Every a part of Medicare is financed via completely different strategies, and the funds allotted to at least one a part of this system can’t be used to cowl bills for one more half.
The time period Medicare tax, also called the hospital insurance coverage tax, refers back to the 2.9% tax on earnings and earnings by present U.S. employees and is the major funding supply for Medicare Half A (hospital insurance coverage). In 2023, roughly $368 million was contributed to Medicare from this Medicare tax.
“Employees, employers, and the self-employed contribute to the Medicare tax, to support our Medicare program for senior and disabled Americans,” says Ge Bai, PhD, CPA, professor of accounting at Johns Hopkins Carey Enterprise College.
Employer and worker contributions to the Medicare tax
Employers are required to withhold Medicare tax from their staff.
“The employer and employee each contribute 1.45% of gross earnings to total the 2.9% Medicare tax withholding,” says Bai.
Right here is an instance, says Bai: An worker has $5,000 in earnings for every pay interval. Along with earnings and Social Safety taxes, the worker portion of Medicare tax, which is 1.45% of that $5,000, or $72.50, can be taken out of that payroll. The identical quantity ($72.50) can be taken out of the employer’s revenues. The entire ($145) can be despatched by the employer to the IRS.
Self-employed contributions to the Medicare tax
Enterprise house owners, contractors, and freelancers are thought of self-employed.
Along with annual earnings tax returns, self-employed people usually pay estimated taxes quarterly.
“Those taxes include the self-employment tax, which is 15.3%,” says Paul Miller, CPA, founder at Miller and Firm. That fee contains 12.4% for the Social Safety tax and a couple of.9% for the Medicare tax.
Miller presents this instance: A enterprise proprietor estimates their quarterly wage and web earnings as $20,000. Along with earnings and Social Safety taxes, the Medicare tax, or 2.9% of that $20,000, or $580, will should be despatched to the IRS.
Further Medicare tax for top earners
In 2013, the Further Medicare Tax got here into impact. It added an extra 0.9% in Medicare taxes for worker earnings and self-employed earnings above a sure threshold.
For workers, that threshold is $200,000 in 2024.
That signifies that for each greenback in earnings over $200,000, the Medicare tax withheld can be 3.8%, which is 2.9% plus 0.9%, says Bai.
For the self-employed, thresholds differ primarily based on tax submitting standing, says Miller. The extra 0.9% tax kicks in if self-employed earnings, wages, and compensation (alongside together with your partner’s if submitting a joint return) are over the edge in your submitting standing:
- Married submitting collectively: $250,000
- Married submitting separate: $125,000
- Single: $200,000
- Head of family (with qualifying particular person): $200,000
- Qualifying surviving partner with dependent baby: $200,000
Medicare tax funds for beneficiaries
The Medicare tax applies even if you’re on Medicare and are nonetheless working. When you’ve got wages or earnings from work, they’re topic to the identical Medicare tax guidelines, says Bai.
Extra on Medicare:
