What is the Medicare tax used for?

The Medicare tax funds Medicare Part A, which provides hospital insurance to eligible Americans over age 65 and individuals with disabilities.

Can I opt out of Medicare tax?

While you may choose not to receive Medicare benefits once you reach the qualifying age, you cannot opt out of paying the Medicare tax.

Do I get Medicare tax back?

If you are an American citizen or resident, you will not get any of the money you paid toward Medicare back as part of any tax refund. On the other hand, there are a few exemptions for nonresident aliens who had Medicare taken out of their paychecks. In the long run, you receive some financial benefit from the tax if you qualify for premium-free Part A Medicare.

Who is exempt from paying Medicare tax?

Nonresident aliens who meet specific criteria are exempt from the Medicare Tax. For example Nonresident alien students, teachers, researchers, and other people who hold an F-1, J-1, M-1, Q-1, or Q-2 nonimmigrant visa and whose stay in the U.S. is temporary do not have to pay. To find out if you qualify for the nonresident exemption, contact the IRS.

What Is the Medicare Tax?

January 6, 2023 Lindsay Malzone Medicare Expert

Author: Lindsay Malzone | January 6, 2023

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Funding Medicare Tax Who Pays? Additional Medicare Tax Final Thoughts

Each year, all American citizens and residents pay 1.45% of their annual earned income to help fund Medicare, and employers match these contributions. By paying these Medicare taxes while you work, you ensure your eligibility to receive premium-free Part A coverage upon retirement.

Retirement Planning: In addition to Medicare, you’ll also want to consider other financial sources that can cover healthcare costs. To learn more, read my guide: How Much Money Do I Need to Retire?

How Medicare Is Funded

Funding for Medicare comes from several places. Its primary sources are two U.S. Treasury accounts: the Hospital Insurance Trust Fund and the Supplemental Medical Insurance Trust Fund.

Medicare Part A

The Hospital Insurance Trust Fund bankrolls Medicare Part A, which is responsible for hospital, hospice, short-term home health, and skilled nursing facility care. This trust fund acquires funds from U.S. payroll taxes, or what many people know as the Medicare tax. It also receives money from income tax revenue, investment interest, and premiums from individuals who don’t qualify for premium-free Part A.

Medicare Part B

Funding for Medicare Part B, which helps pay for preventative care, doctor appointments, routine lab tests, and more, comes primarily from the Supplemental Medical Insurance Trust Fund. This trust fund, which also supports Part D, Medicare’s prescription insurance, gains new money through Medicare Part B and Part D premiums, interest earned on the fund’s investments, and any money Congress agrees to add.

Medicare History: Presidents Truman and Kennedy both pushed for the creation of a national healthcare program for seniors, but many Americans were unreceptive. Finally, in 1965, President Lyndon Johnson signed H.R. 6675, enacting the Medicare program and its initial 0.7% tax.

How Much Is the Medicare Tax?

Although the 2021 Medicare tax is 2.9%, W-2 employees have to cover only half of it: 1.45%. Employers pay the other half. If, however, you are self-employed, the entire 2.9% falls on you. Although this difference may appear negligible, consider how it works when it comes to your check. For example, if you earn $2,500 every two weeks and are a W-2 employee, you’ll end up paying nearly $1,000 annually in Medicare taxes alone. If you own a business or are a sole proprietor at the same pay level, you should expect to pay $2,000 a year in Medicare tax.

The annual amount you owe in Medicare taxes mostly depends on your type of employment and your income level. In most cases, the government withholds the Medicare and Social Security taxes you owe from your paycheck before you receive it. So if you take a look at one of your previous payroll statements, you’ll see a section labeled Medicare. Typically, your paystub will identify the amount of Medicare tax withheld from your current paycheck as well as the year-to-date total. It does the same for Social Security taxes.

Both Parts A and B receive a substantial cash influx from taxes annually. For example, the Hospital Insurance Trust Fund took in $277.6 billion from taxes in 2019. Nevertheless, it’s not always enough. It’s projected that the Hospital Insurance Trust Fund will run out of money as early as 2026. If you expect to be enrolled in Medicare at that point, don’t worry too much. There’s almost no chance the government will allow the program to shut down. While neither scenario is ideal, Congress is likely to account for the gap in funding by either raising the age citizens are eligible to begin receiving Medicare benefits or increasing federal and payroll taxes.

Who Pays the Medicare Tax?

All U.S. employees, employers, and self-employed individuals must contribute to Medicare through taxes, regardless of citizenship or residency. However, there is one categorical exemption: certain nonresident aliens. You can determine whether or not you meet the specific nonresident alien criteria to claim an exemption from the Medicare Tax on the IRS website.

What Is the Additional Medicare Tax?

The Affordable Care Act mandates that some taxpayers who earn a higher income make an additional contribution called the Additional Medicare Tax. According to this law, taxpayers who meet certain income levels must pay an additional 0.9% in Medicare tax. That’s a total of 3.8%. This extra tax helps pay for certain aspects of the Affordable Care Act, such as lowering rates for Medicare Advantage (Part C) plans. Unlike with the main Medicare tax, employers do not pay anything toward the Additional Medicare Tax.

The Medicare tax helps fund the entirety of Medicare.

In order for the government to compel you to pay extra Medicare taxes, your income must exceed $250,000 for Married Filing Jointly, $200,000 for Single or Head of Household, or $125,000 for Married Filing Separately.

Bottom Line

While the Medicare tax might seem like an unnecessary burden on your paycheck, this money –– combined with that of millions of other Americans –– helps fund the entirety of Medicare.

To learn more about all things related to Medicare, its costs, and its coverage, check out our series of guides:

Medicare Tax Frequently Asked Questions

What is the Medicare tax used for?
The Medicare tax funds Medicare Part A, which provides hospital insurance to eligible Americans over age 65 and individuals with disabilities.
Can I opt out of Medicare tax?
While you may choose not to receive Medicare benefits once you reach the qualifying age, you cannot opt out of paying the Medicare tax.
Do I get Medicare tax back?
If you are an American citizen or resident, you will not get any of the money you paid toward Medicare back as part of any tax refund. On the other hand, there are a few exemptions for nonresident aliens who had Medicare taken out of their paychecks. In the long run, you receive some financial benefit from the tax if you qualify for premium-free Part A Medicare.
Who is exempt from paying Medicare tax?
Nonresident aliens who meet specific criteria are exempt from the Medicare Tax. For example
Nonresident alien students, teachers, researchers, and other people who hold an F-1, J-1, M-1, Q-1, or Q-2 nonimmigrant visa and whose stay in the U.S. is temporary do not have to pay. To find out if you qualify for the nonresident exemption, contact the IRS.

Written By

Lindsay Malzone

As the Medicare expert for Medigap.com, Lindsay Malzone has ample experience helping seniors understand the ins and outs of their Medicare coverage and navigating the complex world of supplemental insurance. She has written for a variety of web publications based on her Medicare expertise. Ultimately, her passion lies in helping people find the right healthcare for their needs.