How Medicare Payroll Taxes Work
A superhero turned 52 this year. No, we’re not talking about Spider-Man, though that might technically be true, too. Medicare has been saving lives for just as long (without the spandex).
President Lyndon B. Johnson signed Medicare into law on July 30, 1965. Medicare would go on to become the United States’ largest non-private health insurance program, currently covering over 54 million Americans—more than 15% of our population.
Medicare covers basic health insurance for individuals aged 65 and over. The program also covers younger individuals with long-term conditions such as multiple sclerosis, Parkinson’s, Alzheimer’s, kidney failure, and other disabilities.
So how is Medicare funded? In part, payroll taxes.
Every paycheck, 1.45 percent is deducted from your taxable income to fund the Medicare program. Similarly to Social Security, Medicare also requires that employers contribute at the same percentage. The similarities to Social Security don’t stop there, as Medicare taxes collected from current wage earners and their employers are being used to pay for hospital and medical care costs incurred by all Medicare beneficiaries.
There is a caveat for high-earners: an additional 0.9 percent is collected from employee wages once their taxable income reaches $200,000. Employees exceeding that threshold will start to contribute at 2.35 percent, a withholding that is labeled “Medicare Additional.” Employers are not affected by this rule and continue contributing at 1.45 percent.
Unlike Social Security, Medicare does not have an annual wage base, meaning that the tax doesn’t “turn off” once your income reaches a certain point.
Part A and Enrollment
While the Social Security program is wholly funded through payroll tax contributions, Medicare is not. Medicare has two other sources: beneficiary premiums and general revenue from the government. Those funds are responsible for covering Medicare Parts B and D. The payroll portion of Medicare income is used mainly for Medicare Part A, so that’s what we’ll focus on.
Medicare Part A is the part of the program that offers coverage for emergency visits (i.e., radioactive spider bites) and other treatments while in the hospital. Part A receives almost 90 percent of its funding from payroll tax withholding. The remaining funds come from interest on the Medicare Hospital Insurance Trust Fund. Simply put, this trust holds any payroll tax excess from previous years which then accrues interest.
Similar to most benefit plans, Medicare has an open enrollment period—between January 1 and March 31. This window gives beneficiaries the time to change from Traditional Medicare to Medicare Advantage or vice versa. Your needs may change as time goes on, so it’s good to have options. You can learn more about the ins-and-outs of your available choices at Medicare.gov.
Note that if you’re turning 65 and are enrolling for the first time, you’ll be able to sign-up three months before and after your birthday.
Like any good superhero, Medicare is far from perfect. The program doesn’t cover every healthcare expense, and most recipients are still subject to premiums for coverage and copayments for some services. The Affordable Care Act does offer some additional protections, by requiring that Medicare beneficiaries receive certain preventive services and health screenings free of charge.
Every line on your paystub—even a 1.45 percent tax—matters and has the potential to positively impact an individual’s life. If you’ve ever wondered what Medicare went towards, you now know.
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