What Is Medicare Tax?

If you’ve ever stared at your paycheck and thought, “Who is FICA and why are they taking my money?”,
you’re not alone. A big chunk of that mysterious deduction is Medicare tax, a payroll tax
that helps fund health coverage for older adults and some people with disabilities. Understanding how
Medicare tax works can save you from unpleasant surprises at tax time and help you plan your income and
benefits more intelligently.

In this guide, we’ll break down what Medicare tax is, how it’s calculated, who pays it, what counts as
Medicare wages, and how the Additional Medicare Tax works for higher earners. We’ll also walk
through real-world examples so the numbers actually make sense.

How Medicare Tax Fits Into FICA

Medicare tax is part of a bigger package called FICA, short for the Federal Insurance Contributions Act.
FICA combines:

• Social Security tax: 6.2% from the employee and 6.2% from the employer (up to a yearly wage cap).
• Medicare tax: 1.45% from the employee and 1.45% from the employer on all covered wages, with no cap.

Put those together and a typical W-2 employee pays 7.65% of each paycheck in FICA taxes, and the employer
matches that 7.65%. That means 15.3% of your wage income is going into Social Security and
Medicare combined, with 2.9% of that total going to Medicare.

The big difference between Social Security tax and Medicare tax is the cap: Social Security only applies
up to a certain annual wage base, but Medicare tax applies to all your covered earningsno ceiling.

Medicare Tax Rates in 2025

For most workers and employers in 2025, Medicare tax works like this:

• Employee Medicare tax: 1.45% of all Medicare-taxable wages.
• Employer Medicare tax: 1.45% of those same wages.
• Total basic Medicare tax: 2.9% (1.45% + 1.45%).

But there’s a twist for higher earners: the Additional Medicare Tax. This is an extra
0.9% that only employees (and self-employed people) pay once their income goes over certain
thresholds.

Additional Medicare Tax Thresholds

The 0.9% Additional Medicare Tax applies to wages and/or self-employment income above these income levels:

• $200,000 – Single, Head of Household, or Qualifying Surviving Spouse
• $250,000 – Married Filing Jointly
• $125,000 – Married Filing Separately

These thresholds are based on your total income for the year, not per job. However, your employer has a
simpler rule: they must start withholding the 0.9% Additional Medicare Tax only when your wages from
that employer exceed $200,000 in a calendar year, regardless of your filing status or whether you have
other jobs.

Example: Single Employee Hitting the Additional Medicare Tax

Imagine Alex, a single filer, earns $230,000 in salary from one employer in 2025.

• Medicare tax at 1.45% applies to the entire $230,000.
• Additional Medicare Tax at 0.9% applies to the amount above $200,000.

So, the extra Medicare tax is 0.9% of $30,000 = $270. The employer must withhold that extra $270 during
the year once Alex’s wages pass $200,000.

What Counts as Medicare Wages?

Medicare wages are generally any compensation you receive from your employer that is subject to
Medicare tax. This usually includes:

• Salaries and hourly wages
• Overtime pay and shift differentials
• Bonuses and commissions
• Most taxable fringe benefits
• Reported tips that meet IRS thresholds

Some pre-tax deductions reduce your Medicare wages, while others do not. For example, contributions to a
pre-tax health insurance plan may reduce the amount shown as Medicare wages on your paycheck.
However, 401(k) contributions usually do not reduce Medicare wages, even though they may reduce
your income for federal income tax purposes. That’s why your “Medicare wages” number on your W-2 can be
different from your “federal wages” number.

Items Usually Not Subject to Medicare Tax

Some types of payments are exempt from Medicare tax, such as:

• Certain qualified retirement plan distributions
• Qualified health savings account (HSA) contributions
• Some fringe benefits that are specifically excluded from wages under IRS rules

However, the default assumption is that if it’s pay for work (cash or certain non-cash benefits), it
probably counts as Medicare wages unless there’s a specific exception.

Self-Employment and Medicare Tax

If you’re self-employedfreelancer, independent contractor, gig worker, or business owner without a
separate payrollyou don’t get to “split” FICA with an employer. Instead, you pay self-employment
tax, which covers both Social Security and Medicare.

For 2025, the combined self-employment tax rate is generally:

• 15.3% total on net self-employment earnings up to the Social Security wage base, consisting of:
  • 12.4% Social Security
  • 2.9% Medicare
• 2.9% Medicare continues to apply on net earnings above the Social Security wage base (no cap).

You may also owe the 0.9% Additional Medicare Tax on your self-employment income (combined with
any wages) above the same thresholds listed earlier.

Self-employment tax is calculated on Schedule SE and then reported on your Form 1040. The IRS
allows you to deduct the “employer half” of the self-employment tax (7.65%) as an adjustment to income, which
softens the blow a bitbut you still pay the full 15.3% in actual tax.

Example: Self-Employed Designer

Taylor is a self-employed graphic designer with $90,000 in net earnings from self-employment:

• Self-employment tax at 15.3% applies to most of that amount.
• Of that 15.3%, 2.9% represents Medicare tax.
• Taylor may deduct half of the self-employment tax as an adjustment to income on Form 1040.

Because Taylor’s total income is below the Additional Medicare Tax thresholds, there’s no extra 0.9% due.

How Medicare Tax Shows Up on Your Paycheck and Tax Return

For employees, you’ll usually see Medicare tax in two main places:

1. On Your Paycheck Stub

Most pay stubs have a line labeled something like “Medicare” or “Medicare tax” showing 1.45% of your gross
Medicare wages withheld for the pay period. If your year-to-date wages from that employer exceed $200,000,
you may also see a line for Additional Medicare.

2. On Your Form W-2

At year-end, your W-2 will show:

• Box 5 – Medicare wages and tips
• Box 6 – Medicare tax withheld

These numbers flow to your Form 1040. If the total Medicare wages from all your jobs (plus any
self-employment income) push you over the Additional Medicare Tax threshold, you may need to file
Form 8959, Additional Medicare Tax, to compute and reconcile that extra 0.9%.

What Does Medicare Tax Pay For?

Medicare tax primarily funds Medicare Part A, the Hospital Insurance (HI) portion of Medicare.
Part A helps pay for:

• Inpatient hospital stays
• Skilled nursing facility care (under certain conditions)
• Some home health and hospice care

Together with other funding sources, Medicare tax helps keep the program’s Hospital Insurance Trust Fund
going. In other words, your payroll taxes today help pay for current beneficiaries’ hospital coveragewhile
future workers’ taxes will help pay for yours.

Common Medicare Tax Mistakes to Avoid

1. Ignoring Multiple Jobs

If you have two or more employers, no single employer may withhold the Additional Medicare Taxeven if your
combined income is well over the threshold. For example, two jobs paying $180,000 each leave you with
$360,000 of wages, but neither employer sees more than $200,000, so neither withholds the 0.9%. You may
still owe it when you file and need to plan for that with extra withholding or estimated tax payments.

2. Underestimating Self-Employment Tax

Many new freelancers focus only on income tax and forget about the 15.3% self-employment tax that includes
the Medicare portion. That surprise can hurt. Building estimated tax payments into your cash flow from the
beginning can prevent a nasty bill in April.

3. Confusing Income Tax With Medicare Tax

Medicare tax is separate from federal income tax. Even if your taxable income is reduced by deductions,
credits, or retirement contributions, your Medicare tax may still be based on the higher gross wage or
self-employment income figure. That’s why your tax return can show a smaller income tax but a relatively
steady Medicare tax.

How to Plan Around Medicare Tax

While you can’t avoid Medicare tax on wages and self-employment income, you can plan around it:

• Adjust your withholding if you know you’ll exceed the Additional Medicare Tax thresholds.
• Use estimated tax payments if you’re self-employed or have multiple income sources.
• Coordinate income timing when possiblesuch as bonuses, stock options, or business drawsto manage the impact of the 0.9% surcharge.
• Work with a tax professional if you’re near the thresholds or have a complex mix of wages, self-employment income, and investment income.

Medicare tax is not optional, but surprise bills are. Paying attention to your pay stubs and planning
ahead can make the whole process feel far less painful.

Real-Life Experiences With Medicare Tax

The mechanics of Medicare tax are one thing; what it feels like in real life is another story. Here are a
few common scenarios that capture people’s experiences with Medicare tax and the Additional Medicare Tax.

1. The First Paycheck Wake-Up Call

For many people, their first full-time paycheck is a mix of excitement and mild heartbreak. You get hired
at $60,000 a year, do the math, and imagine a certain monthly amount. Then the paycheck arrives and FICA
has taken a noticeable bite, including that 1.45% Medicare tax. You might not love it, but it becomes part
of your mental budget: “That’s just what a paycheck looks like.”

Over time, people often stop thinking about the exact Medicare percentage and instead see it as part of
the cost of having the safety net there when they or their parents need it. When a parent or grandparent
ends up in the hospital and Medicare steps in to cover much of the cost, those payroll deductions suddenly
feel a lot more concrete.

2. Dual-Earner Couples and the Surprise 0.9%

A very common “wait, what?” moment happens to dual-earner couples. Picture a married couple, each earning
$140,000. Neither employer withholds the Additional Medicare Tax, because neither person individually earns
more than $200,000 from any one employer. But when they file jointly, their combined $280,000 in wages
exceeds the $250,000 threshold.

The result: the couple discovers they owe the 0.9% Additional Medicare Tax on $30,000 of income. It’s not a
life-ruining bill, but it can be an unwelcome surprise if they haven’t planned for it. Many couples in this
situation end up either asking an employer to withhold extra income tax or making quarterly estimated tax
payments once they understand how the threshold works.

3. The Self-Employed Reality Check

Self-employed people often have the most dramatic Medicare tax “learning curve.” Someone leaves a W-2 job
to start their own consulting business and loves seeing client payments arrive with no withholding. It
feels like getting 100% of what they earnuntil tax season.

When they prepare their return, they discover self-employment tax: 15.3% on their net earnings, including
the 2.9% Medicare portion and, if their income is high enough, the 0.9% Additional Medicare Tax. The first
year, this can be a shock. By the second year, most self-employed folks set aside a dedicated percentage
of each paymentsometimes in a separate savings accountso that Medicare and Social Security contributions
are covered without drama.

4. Small Business Owners on the Employer Side

For small business owners with employees, Medicare tax shows up in a different way. They’re responsible
for withholding 1.45% from each employee’s paycheck and also contributing 1.45% of their own funds as the
employer portion. They must also start withholding the Additional Medicare Tax once an individual
employee’s wages exceed $200,000.

Many business owners describe it as paying “twice”once for themselves as employees of their own company,
and once as employers. But they also know that failing to handle payroll taxes properly is one of the
fastest ways to get in trouble with the IRS. So, they invest in good payroll software or hire professionals
to make sure Medicare tax, Social Security tax, and income tax withholding are all handled correctly.

5. Near-Retirees Seeing the Full Circle

Finally, there are people approaching or in retirement. After decades of seeing “Medicare” on every W-2 and
pay stub, they begin receiving Medicare benefits themselves. Hospital stays that might otherwise generate
eye-watering bills are partly covered by Medicare Part A, which the Medicare tax helped fund all along.

Many retirees say that while no one enjoys paying more tax, the connection between the small percentage
taken out of each paycheck and the huge hospital costs covered later becomes very clear. For them, Medicare
tax feels less like a mystery deduction and more like a long-term insurance premium that finally pays off
when they need it most.

Bottom Line

Medicare tax may look like a small line item on your paycheck, but it plays a huge role in funding the
healthcare system for older adults and some people with disabilities in the United States. Understanding
the standard 1.45% rate, the employer match, and the 0.9% Additional Medicare Tax helps you decode your
pay stub, avoid unpleasant surprises at tax time, and appreciate the connection between today’s payroll
deductions and tomorrow’s healthcare coverage.

Whether you’re a W-2 employee, a high earner juggling multiple jobs, or a self-employed professional,
Medicare tax is part of your financial reality. The good news is that with a bit of knowledge and some
smart planning, you can manage it confidently instead of being blindsided by it.