Medicare Wages: Definition, How They're Taxed, Limits and Rates

What Are Medicare Wages?

Medicare wages are employee earnings that are subject to a U.S. payroll tax known as the Medicare tax. Similar to the other U.S. payroll tax, Social Security, the Medicare tax is used to fund the government's Medicare program, which provides subsidized healthcare and hospital insurance benefits to people ages 65 and older and to people with disabilities.

Medicare and Social Security taxes are levied on both employees and employers under the Federal Insurance Contributions Act (FICA).

Understanding Medicare Wages

There is no limit on Medicare wages. The employee's share of the Medicare tax is a percentage withheld from their paycheck. In 2022 and 2023, the Medicare tax is 1.45% on an individual's wages. Employers also pay 1.45%.

There is also a 0.9% Additional Medicare Tax that only the employee filing an individual tax return pays for wages that exceed $200,000. The additional tax also applies to those whose wages exceed $250,000 if they are married and file a joint return and exceed $125,000 for married taxpayers filing a separate return.

For 2022 and 2023, the rate for the Social Security tax is 6.2% for the employee and 6.2% for the employer, or 12.4% total. The tax applies to the first $147,000 of income in 2022, and up to $160,200 in 2023. The Social Security tax rate is assessed on all types of income that an employee earns, including salaries, wages, and bonuses.

Medicare Tax for the Self-Employed

Under the Self-Employed Contributions Act (SECA), the self-employed are also required to pay Social Security and Medicare taxes. In 2022 and 2023, the Medicare tax on a self-employed individual’s income is 2.9%, while the Social Security tax rate is 12.4%. The maximum Social Security tax that a self-employed person would pay is $18,228 in 2022 and $19,864.80 in 2023.

Self-employed individuals must pay double the Medicare and Social Security taxes that traditional employees pay because employers typically pay half of these taxes. But they are allowed to deduct half of their Medicare and Social Security taxes from their income taxes.

The CARES Act of 2020

On March 27, 2020, former President Trump signed a $2 trillion coronavirus emergency stimulus package, called the CARES (Coronavirus Aid, Relief, and Economic Security) Act, into law. It expands Medicare's ability to cover treatment and services for those affected by COVID-19. The CARES Act also:

• Increases flexibility for Medicare to cover telehealth services.
• Authorizes Medicare certification for home health services by physician assistants, nurse practitioners, and certified nurse specialists.
• Increases Medicare payments for COVID-19–related hospital stays and durable medical equipment.

For Medicaid, the CARES Act clarifies that non-expansion states can use the Medicaid program to cover COVID-19-related services for uninsured adults who would have qualified for Medicaid if the state had chosen to expand. Other populations with limited Medicaid coverage are also eligible for coverage under this state option.

Special Considerations

In addition to noting particular withdrawals for Medicare and Social Security from each paycheck, an employee should consider options for saving for retirement. In many cases, you can elect to have a portion deducted from your paycheck for this purpose.

Many employers offer certain types of retirement plans, depending on the length of time an employee has been with an organization (known as vesting) and the type of organization (company, nonprofit, or government agency).

Many companies, for example, offer a 401(k) plan. A 401(k) is a qualified employer-sponsored retirement plan into which eligible employees can make salary deferral contributions. Earnings in a 401(k) accrue on a tax-deferred basis.

A 403(b) retirement plan is comparable to a 401(k) plan but is designed specifically for employees of public schools, tax-exempt organizations, and certain ministers. A 457 plan is a retirement plan offered to state and local government employees.

The most common investments offered in 401(k) plans are mutual funds. A 403(b) lets employees invest in a tax-sheltered annuity plan or a designated Roth account.

You can also opt to save for retirement via an IRA in the event your employer does not offer a retirement plan, or you can use one to save an additional amount for retirement above and beyond the money saved in an employer-sponsored plan. As with a 401(k), retirement savers can enjoy the benefit of tax-deferred savings in a traditional IRA.