What is the Medicare fee? | Fortune Well

That funding, totaling $1 trillion in 2023, comes from a combination of government contributions, payroll taxes, and monthly premiums paid by Medicare beneficiaries. Each part of Medicare is funded by different methods, and funds allocated to one part of the program cannot be used to cover expenses for another part.

The term Medicare tax, also known as the hospital insurance tax, refers to the 2.9% tax on the earnings and earnings of current US workers and is the primary source of funding for Medicare Part A (hospital insurance). In 2023, approximately $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 older and disabled Americans,” says Ge Bai, PhD, CPA, professor of accounting at Johns Hopkins Carey Business School.

Employer and employee contributions to the Medicare tax

Employers are required to withhold Medicare tax from their employees.

“The employer and employee each contribute 1.45 percent of gross earnings to total the 2.9 percent Medicare withholding tax,” says Bai.

Here’s an example, says Bai: An employee has $5,000 in earnings each pay period. In addition to income taxes and Social Security, the employee portion of the Medicare tax, which is 1.45 percent of the $5,000 or $72.50, will be taken out of your payroll. The same amount ($72.50) will be deducted from the employer’s income. The total amount ($145) will be sent by the employer to the IRS.

Self-Employed Contributions to the Medicare Tax

Business owners, entrepreneurs and the self-employed are considered self-employed.

In addition to annual income tax returns, self-employed people generally pay quarterly estimated taxes.

“These taxes include self-employment tax, which is 15.3 percent,” says Paul Miller, CPA, founder of Miller and Company. This rate includes 12.4% for Social Security tax and 2.9% for Medicare tax.

Miller offers this example: A business owner estimates his quarterly salary and net income at $20,000. In addition to income and social security taxes, Medicare tax or 2.9% of the $20,000 or $580 will need to be sent to the IRS.

Medicare Surcharge for High Incomes

In 2013, the Medicare Surcharge came into effect. It added an additional 0.9% to Medicare taxes on employee income and self-employed income above a certain threshold.

For employees, that threshold is $200,000 in 2024.

That means for every dollar in earnings over $200,000, the Medicare tax withheld will be 3.8 percent, or 2.9 percent plus 0.9 percent, Bai says.

For the self-employed, the thresholds vary by tax filing status, Miller says. The additional 0.9% tax kicks in if your earnings, wages, and self-employment compensation (along with your spouse’s if you file a joint return) exceed the threshold for your filing status:

• Married filing jointly: $250,000
• Married filing separately: $125,000
• Singles: $200,000
• Head of household (with eligible person): $200,000
• Eligible surviving spouse with dependent child: $200,000

Medicare fee payments for beneficiaries

The Medicare tax applies even if you are on Medicare and still working. If you have wages or earnings from work, they are subject to the same Medicare tax rules, Bai says.

More about Medicare: