Some United States taxpayers in a higher income bracket must pay an extra 0.9% Medicare tax on their Medicare payments.
In 2013, the Internal Revenue Service (IRS) levied the tax as a part of the Affordable Care Act. Only a person who earns more than $200,000 has to pay this tax. The limit is $250,000 for married couples.
This article explains the Medicare standard tax and the Medicare additional tax. It also looks at who pays the additional tax, how the IRS calculates it, and how the government uses the money.
As part of the Federal Insurance Contributions Act (FICA), the Social Security Administration (SSA) collects payments from taxpayers that go towards funding Medicare.
The standard Medicare tax applies to all earned income, with no minimum income limit. Everyone who works as an employee in the U.S. must pay Medicare tax on their earnings. People who are self-employed must also pay the standard Medicare tax.
Who deducts the standard Medicare tax?
Employers contribute 1.45% for each employee, based on the employee’s monthly earnings. An employer must also deduct payroll taxes of 1.45% from their employees’ monthly earnings.
A self-employed person must contribute 2.9%.
In 2013, the IRS announced that some higher-earning taxpayers would have to pay more money into Medicare through the additional Medicare tax, as part of the Affordable Care Act.
The additional Medicare tax of 0.9% applies only to higher wage earners. It is paid in addition to the standard Medicare tax.
An employee will pay 1.45% standard Medicare tax, plus the 0.9% additional Medicare tax, for a total of 2.35% of their income.
A person who is self-employed will pay 2.9% standard Medicare tax, and an additional Medicare tax of 0.9%, for a total of 3.8%.
Employers do not have to contribute any amounts through the additional Medicare tax.
A person is liable for the additional Medicare tax after their total income goes above the threshold for their filing status. The 2020 tax year thresholds are as follows:
| Status | Tax threshold |
|---|---|
| single, head of household, or a qualifying widow(er) | $200,000 |
| married tax filers, filing jointly | $250,000 |
| married tax filers, filing separately | $125,000 |
For individuals with a salary above these thresholds, the employer withholds the additional 0.9%.
If someone has an income above these thresholds because of a combination of salary and income from other sources, they can ask their employer to withhold the 0.9% additional tax from their paycheck.
Liable self-employed people should include a 0.9% additional tax in their estimated annual tax payments. The IRS can adjust the amount when the individual files their taxes.
The additional Medicare tax applies to income above the thresholds. It does not apply to the entire income, only on the amount that exceeds the limit.
The examples below are based on the 2020 tax year thresholds.
For example, if a person is a single tax filer who earns $300,000 through their job, they would pay the standard 1.45% on $200,000 of their income, and then 2.35% on the other $100,000. The total Medicare tax payment would be $2,900 on the $200,000 plus $2,350 on the $100,000, totalling $5,250 in Medicare taxes for the year.
For a married couple filing a joint return, the amounts would be different. If one person earns $80,000 in wages, and the second person earns $250,000, their combined total wages are $330,000. They would be liable for the additional Medicare tax only on $80,000, which is the amount in excess of $250,000. The total Medicare tax payment would be 1.45% or $3,625 on the $250,000, plus 2.35% or $1,880 on the $80,000, totalling $5,505 in Medicare taxes for the year.
The additional Medicare tax provides funding for some parts of the Affordable Care Act, which requires all U.S. citizens to have minimum essential health insurance coverage. The coverage could be available through an employer, benefits, or other sources.
With the Affordable Care Act, a person enrolled in Medicare no longer had to worry about the Medicare Part D coverage gap, also known as the donut hole.
The Affordable Care Act also expanded Medicare Part B preventive services to include:
- abdominal aortic aneurysm and cardiovascular disease screenings
- alcohol misuse screenings and counseling
- cervical and vaginal and some colorectal cancer screenings
- sexually transmitted infections and HIV screenings and counseling
- type 2 diabetes screenings
- obesity screenings and nutrition counseling
- certain vaccines, such as the flu, pneumococcal, and hepatitis B shot
- one-time ‘Welcome to Medicare’ preventive visit and annual wellness visits
The additional Medicare tax helps also helps lower the cost of Medicare Advantage plans and prescription medications.
There are some changes to taxes due to coronavirus (COVID-19), and a person can check for the most recent changes on the IRS website.
Both employed and self-employed individuals pay some of their income into Medicare through taxes. Since 2013, the additional Medicare tax is applied to income above designated levels.
The standard Medicare tax is 1.45% if someone is an employee or 2.9% if a person is self-employed. Single tax filers earning above $200,000, or $250,000 for married couples, pay the 0.9% additional Medicare tax.