If your income exceeds $200,000 a year, you may owe the Additional Medicare Tax.
Original Medicare, which consists of Medicare Part A (hospital insurance) and Medicare Part B (medical insurance) is federal health insurance for:
· People aged 65 and older
· Some younger people with disabilities
· Those with end-stage renal disease (ESRD)
After enrolling, Part B has a monthly premium you must pay in order to receive benefits ($164.90 in 2023). However, for most beneficiaries, Part A coverage has a $0 premium. This is because you pay Medicare taxes that go toward this coverage while you’re employed.
The Medicare tax rate you pay depends on your income and tax filing status. You may just be subject to the standard Medicare Tax, or you could face an Additional Medicare Tax. Read on to learn more.
What is the Medicare Tax?
When employed, the Medicare Tax is automatically taken out of your paycheck. This tax, which is split between employees and employers, is used to cover Part A. (Self-employed individuals’ income is also subject to this tax, with the entire tax paid by the individual during quarterly tax filings.)
The amount deducted is calculated using your gross pay minus any pre-tax health care deductions (such as insurance, a health savings plan (HSA), etc.). This leaves the Medicare taxable wages. The Medicare Tax is 1.45% of this amount. You and your employer each pay this amount, for a total Medicare Tax of 2.9%.
The deduction will likely show as a Federal Insurance Contributions Act (FICA) deduction on your paycheck, which includes both Medicare and Social Security taxes.
How does the Additional Medicare Tax work?
An Additional Medicare Tax was implemented in 2013 as part of the Affordable Care Act (ACA). High-income earners pay an additional 0.9% tax on top of the 1.45% paid by all employees, though the limit depends on your filing status for your tax return.
The income thresholds for the Additional Medicare tax are:
· $200,000 or more for single filers
· $250,000 or more if you’re married filing jointly
· $125,000 or more if you’re married filing separately
· $200,000 or more if you file as head of household
· $200,000 or more for qualifying widow(er) filers who have a dependent child
In total, these individuals pay 2.35% if receiving employment wages.
Employers are required to withhold that additional 0.9%. If you have more income from other sources that put you over the above limits, you may request your employer to withhold this amount from your checks.
If you’re self-employed and meet one of the income threshold levels above, you’ll pay 3.8%, and you must include this in your estimated tax payments. Note that income from wages, self-employment, Railroad Retirement (RRTA), and other compensation all count toward the income that the Internal Revenue Service (IRS) considers.
While everyone pays some taxes toward Medicare, you only pay the Additional Medicare Tax if you meet the above income thresholds.
How to calculate the Additional Medicare Tax
When you file taxes, you’ll calculate your Additional Medicare Tax for the year. Note that you’ll only pay the additional tax on the amounts above the limits listed here.
For example, if you’re a single tax filer with an employment income of $210,000, you pay:
· 1.45% on $200,000 of your income
· 2.35% on the remaining $10,000 of your income
In this example, you’d pay $3,135 in Medicare taxes.
How to avoid the Additional Medicare Tax
If you’re right around the limit for the Additional Medicare Tax, you may be able to help avoid the tax by using pre-tax deductions such as:
· Retirement accounts, like a 401(k) or 403(b)
· Flexible spending account (FSA)
However, everyone must pay the regular Medicare tax of 1.45%, so you won’t be able to avoid paying Medicare taxes completely.
Why is the Additional Medicare Tax deducted?
The Medicare tax was established in 1966 to help those facing declining income yet increasing health care needs. When you retire, your income is limited to that which you’ve saved over the years you’ve worked and Social Security retirement benefits. Paying the Medicare tax while employed helps ensure beneficiaries have affordable Part A coverage, which includes benefits like:
· Inpatient hospital stays
· Some home health services
· Hospice care
· Skilled nursing facility (SNF) care
The Additional Medicare Tax then helps to fund some elements of the ACA, including the premium tax credit and other features like:
· Lower premiums for Medicare Part C (Medicare Advantage) plans
· Lower prescription drug costs, including closure of the Part D benefit gap (i.e., donut hole)
· $0 vaccines
· $0 preventive care services and screenings, such as those for depression, heart disease, diabetes, some cancers, and other health concerns
· Additional chronic care management programs
These benefits can help keep Medicare beneficiaries healthier, longer.
What happens if I don’t pay the Medicare tax?
If your employer doesn’t withhold Medicare and/or Social Security taxes from your pay, they are breaking tax laws and could face legal reprimands. If this is the case, check that there’s no error or that you didn’t accidentally claim exempt status. Follow up with your employer.
Then, whether you pay Medicare Tax determines what you’ll pay for Part A coverage. If you or your spouse pay Social Security/Medicare taxes for 10 years (40 quarters), you’ll qualify for premium-free Part A.
Otherwise, you’ll have to purchase Part A:
· For those who worked and paid taxes for at least 30 quarters, the Part A monthly premium is $278 (in 2023)
· For those who worked and paid taxes for fewer than 30 quarters, the Part A monthly premium is $506 (in 2023)
If you must buy Part A, you are not automatically enrolled. We walk you through how to do that here.
And if you have questions about your Medicare options, our licensed agents can walk you through that, too. Or, if you’d like to do a bit of research before you call, our Find a Plan tool is fast and easy. Just enter your zip code to start comparing Medicare plans in your area.
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