Medicare and Medicaid tax rates work very differently: Medicare is funded by a payroll tax of 1.45% on employees and 1.45% on employers (2.9% total), with a 0.9% surcharge on high earners and a related 3.8% tax on investment income above certain thresholds. Medicaid has no dedicated payroll tax at all. It is paid for out of general federal and state revenue, which is why you will never see a “Medicaid” line on your pay stub.
The Standard 1.45% Medicare Payroll Tax
Every paycheck has 1.45% withheld for Medicare under the Federal Insurance Contributions Act. Your employer pays a matching 1.45% from its own funds.1Office of the Law Revision Counsel. 26 USC 3111 – Rate of Tax Combined, 2.9% of your gross wages flows into Medicare’s Hospital Insurance Trust Fund, which pays for Part A benefits: inpatient hospital stays, skilled nursing care, hospice, and some home health services.2Medicare.gov. How Is Medicare Funded
One detail catches people off guard. Medicare tax has no wage ceiling. Social Security tax stops applying once your earnings hit $184,500 in 2026, but the 1.45% Medicare tax keeps going on every dollar you earn no matter how high your salary climbs.3Social Security Administration. Contribution and Benefit Base High earners often notice this partway through the year, when Social Security withholding drops off but Medicare withholding does not.
The Additional 0.9% Medicare Tax for High Earners
On top of the standard 1.45%, workers with higher incomes owe an extra 0.9% called the Additional Medicare Tax. Only the employee pays it; there is no employer match.4Office of the Law Revision Counsel. 26 USC 3101 – Rate of Tax The practical effect: a high-earning employee pays 2.35% on wages above the threshold, while the employer’s rate stays at 1.45%.
The income levels that trigger the surcharge depend on filing status:
- Single or head of household: $200,000
- Married filing jointly: $250,000
- Married filing separately: $125,000
These thresholds are set by statute and are not adjusted for inflation, so they have stayed the same since the tax took effect in 2013.5Internal Revenue Service. Additional Medicare Tax
Employers cannot know your filing status or whether your spouse earns income, so the withholding rule is simpler than the tax rule. Your employer must start withholding the extra 0.9% once your wages pass $200,000 in a calendar year, regardless of how you file.6Internal Revenue Service. Questions and Answers for the Additional Medicare Tax If you file jointly and your combined income stays under $250,000, the excess withholding is credited back on your return. If you file separately and the real threshold is $125,000, you may owe more than what was withheld. The final calculation happens on Form 8959.
The 3.8% Net Investment Income Tax
The 3.8% Net Investment Income Tax (NIIT) is not technically a payroll tax, but it feeds Medicare funding and uses the same thresholds, so it belongs alongside the rates above. It applies to the lesser of your net investment income or the amount by which your modified adjusted gross income exceeds the threshold for your filing status.7Office of the Law Revision Counsel. 26 USC 1411 – Imposition of Tax
The thresholds mirror the Additional Medicare Tax: $200,000 for single or head of household, $250,000 for married filing jointly, $125,000 for married filing separately.
Investment income for this purpose includes taxable interest, dividends, capital gains, rental and royalty income, annuities, and income from passive business activities.8Internal Revenue Service. Instructions for Form 8960 Wages, self-employment earnings, and distributions from most retirement accounts do not count as investment income under this tax. You calculate the NIIT on Form 8960 and add it to your annual return. Like the Additional Medicare Tax thresholds, the NIIT thresholds are not indexed for inflation, so more taxpayers fall within reach every year without any change in the law.
Medicare Tax If You Are Self-Employed
When you work for yourself, you pay both halves. That means the full 2.9% Medicare tax on your net self-employment income.9Office of the Law Revision Counsel. 26 USC 1401 – Rate of Tax The calculation starts with your net business earnings, not gross revenue. If your net self-employment income clears the filing-status thresholds above, you also owe the 0.9% Additional Medicare Tax on the excess.
There is one meaningful break. You can deduct half of your self-employment tax, the employer-equivalent portion, when calculating adjusted gross income.10Office of the Law Revision Counsel. 26 USC 164 – Taxes That deduction lowers your income tax but does not reduce the self-employment tax itself. The 0.9% surcharge is excluded from the deduction.
Because no employer is withholding for you, the IRS expects quarterly estimated payments on Form 1040-ES. You generally need to have paid in at least 90% of your current year’s tax liability or 100% of last year’s liability through those installments. Fall short and you may owe an underpayment penalty calculated on Form 2210.11Internal Revenue Service. Self-Employment Tax Social Security and Medicare Taxes
Penalties for Employers Who Fail to Remit Medicare Tax
Medicare and Social Security withholdings are treated as trust fund taxes. The money legally belongs to the government the moment it is withheld from an employee’s paycheck, and the penalties for holding onto it are harsher than most people expect. Employers who fall behind on depositing these taxes face a tiered structure:
- 1 to 5 days late: 2% of the unpaid deposit
- 6 to 15 days late: 5%
- More than 15 days late: 10%
- More than 10 days after an IRS notice demanding payment: 15%
These percentages replace one another rather than stacking, so a deposit that is 20 days late incurs 10%, not 17%.12Internal Revenue Service. Failure to Deposit Penalty
The sharper risk is the Trust Fund Recovery Penalty. If a responsible person, meaning an officer, partner, owner, or anyone else with authority over the business’s finances, willfully fails to turn over withheld taxes, the IRS can hold that individual personally liable for the full amount of the unpaid tax plus interest. “Willfully” here means choosing to pay other business expenses instead of remitting the taxes, and it does not require an intent to defraud.13Internal Revenue Service. Trust Fund Recovery Penalty The corporate form does not shield individuals from personal liability for trust fund taxes.
Why Medicaid Has No Payroll Tax
Medicaid does not appear on your pay stub because there is no dedicated payroll tax for it. The program is a joint venture between the federal government and the states, authorized under Title XIX of the Social Security Act.14Social Security Administration. Social Security Act Title XIX – Grants to States for Medical Assistance Programs Both sides pay for it out of general revenue: federal income and corporate taxes on one side, and state sales taxes, income taxes, and other revenue on the other.
The federal share varies by state through a formula called the Federal Medical Assistance Percentage. The formula compares each state’s per capita income to the national average, so poorer states get a larger federal match and wealthier states get less. By statute, no state receives less than 50% federal funding, and the ceiling is 83%.15Congress.gov. Medicaids Federal Medical Assistance Percentage FMAP A state with average income receives roughly 55% of its Medicaid costs from the federal government.