Medicare tax is a payroll tax that funds Medicare Part A hospital insurance, collected at 1.45% from both employees and employers on all wages, with an additional 0.9% surtax on high earners. Unlike Social Security tax, Medicare tax has no wage cap, making it a permanent fixture in compensation planning regardless of income level.
Understanding Medicare tax becomes critical when structuring compensation packages, especially for high earners or when managing contractor relationships. The tax applies differently across employment structures, creating strategic considerations for workforce planning.
Current Medicare Tax Rates and Thresholds
| Tax Component | Rate | Income Threshold | Applies To |
| Base Medicare Tax | 1.45% | All wages | Employee + Employer (2.9% total) |
| Additional Medicare Tax | 0.9% | $200K+ (single), $250K+ (married filing jointly) | Employee only |
| Self-Employment | 2.9% | All self-employment income | Self-employed individuals |
The additional Medicare tax threshold hasn’t been adjusted for inflation since 2013, meaning more professionals hit this higher rate each year as salaries increase.
Employee vs. Contractor Medicare Tax Implications
W-2 Employees:
- Employer pays 1.45% match on all wages
- Employee pays 1.45% on all wages
- Additional 0.9% on high earners (employee portion only)
- Automatic withholding and remittance
1099 Contractors:
- Pay full 2.9% as self-employment tax
- No employer match or withholding
- Responsible for quarterly estimated payments
- Can deduct employer-equivalent portion
This difference creates a hidden cost advantage for contractor relationships, particularly for roles that don’t require direct employee benefits.
Strategic Planning Considerations
For High-Earning Employees: The additional Medicare tax creates a cliff effect at income thresholds. Consider timing of bonuses, stock option exercises, or other compensation to manage tax impact across tax years.
For Compensation Structure: Medicare tax applies to all forms of wages including bonuses, commissions, and most benefits. However, certain pre-tax benefits (health insurance premiums, 401k contributions) reduce the Medicare tax base.
For Workforce Mix Decisions: The Medicare tax difference between employees and contractors represents a 1.45% cost savings on the employer side, but contractors typically command higher rates to offset their additional tax burden and lack of benefits.
Common Medicare Tax Scenarios
Scenario 1: Employee earning $180,000
- Medicare tax: $2,610 (employee) + $2,610 (employer) = $5,220 total
- No additional Medicare tax
Scenario 2: Employee earning $220,000
- Base Medicare tax: $3,190 (employee) + $3,190 (employer)
- Additional Medicare tax: $180 (employee only, on $20,000 excess)
- Total: $6,560
Scenario 3: Contractor earning $180,000
- Self-employment Medicare tax: $5,220
- Can deduct $2,610 (employer-equivalent portion)
- Net effective rate: approximately 2.05%
Year-End Tax Planning
Medicare tax withholding follows a calendar year pattern, but the additional Medicare tax calculation considers total annual income. This creates potential overwithholding or underwithholding situations for:
- Employees with multiple jobs
- Employees with significant bonus timing variations
- Married couples with combined high incomes
Frequently Asked Questions (FAQs)
Medicare premiums paid are separate from Medicare tax. Premium deductibility depends on your tax situation and whether you’re itemizing deductions.
The base rate remains 1.45% for employees and employers each. The additional Medicare tax is 0.9% on income above $200,000 (single) or $250,000 (married filing jointly).
Self-employed individuals pay 2.9% Medicare tax on all self-employment income, plus the additional 0.9% on high earnings.
Medicare tax funds Medicare Part A hospital insurance coverage. Unlike Social Security, you continue paying Medicare tax on all income regardless of age or income level.
