Many people think that since they paid the Medicare tax while they worked, Medicare would be free once they became Medicare eligible. It can be surprising to some to find out Medicare is not free. You may have noticed the Medicare tax on your weekly or biweekly payroll statements. The statements only show you how much money has been withheld from your total amount. It does not state the percentage that is used to calculate the Medicare tax. It’s important to know about the tax withholdings and what that money funds.
What is the Medicare tax?
The Medicare tax is a payroll tax which means the tax withholding is on every paycheck you receive while you work. It is an employer and employee tax, so the employer must match the percentage of the employee’s compensation. The amount that is taken out of the paycheck is 1.45% of the employee’s wages. Between the employee’s and employer’s percentage, Medicare makes up 2.9% of the Federal Insurance Contributions Act (FICA) tax. The Social Security tax is the other portion of the FICA tax withheld from an employee’s wages.
All compensation, including regular ages, overtime, commissions, and others, are all subject to the Medicare tax. However, health insurance premiums are not subject to this tax, and this tax will apply to all income levels.
Where does this money go?
The amount that is withheld from your check will fund Medicare. During the time you have worked, you have been paying into Medicare. When you work 40 quarters or ten years in the United States, you will qualify for premium-free Part A. If you have worked less than 40 quarters, you can be eligible through a spouse’s work history, or you will need to pay a premium for Part A.
Medicare Part A is your inpatient hospital coverage. When you are admitted as an inpatient, you must pay the Part A deductible, which is $1,484 in 2021.
Additional Medicare tax
Although the Medicare tax applies to all income levels, there is also an additional Medicare tax for those above a certain income threshold. The additional percentage an employee must have withheld is 0.9%. However, the employer does not need to match the additional amount. This additional Medicare tax has been effective since 2013 and is applied to all wages, self-employment income, and compensation above a specific threshold.
The threshold amount if you are married and filing jointly is $250,000. If you are married but filing separately, then the threshold is $125,000. For those that are single, head of household with a qualifying person, or qualifying widow with a dependent child, the threshold is $200,00.
When you are self-employed, you need to pay both portions of the Medicare tax and the Social Security tax. This means the employer and employee portions. The total FICA amount that needs to be withheld from your wages is 15.3%, with Medicare making up 2.9% of that. If your income also hits above the additional Medicare tax thresholds, you will need to withhold the additional 0.9%.
It is easy to overlook the taxes withheld from your wages and not think twice about them. However, it is beneficial to understand where that money goes and how it is calculated. If you hope to qualify for premium-free Part A once you are Medicare eligible, you will need to pay into this tax for at least ten years. Educating yourself on the cost of Medicare before you are eligible will help prepare you for the future. Next time you receive your payroll statement, take the time to look at your Medicare tax now that you are more aware of the details.