Medicare tax funds hospital and inpatient medical care for Americans aged 65 and older, younger people with certain disabilities, and those with end-stage kidney disease. The tax is withheld from every paycheck at a rate of 1.45% for employees, with employers matching that amount for a combined 2.9%. That revenue flows into the Hospital Insurance Trust Fund, which pays for Medicare Part A benefits.
What Medicare Tax Pays For
The money goes specifically to Medicare Part A, which covers four main categories of care: inpatient hospital stays, skilled nursing facility care, hospice care, and some home health services. These are the most expensive types of medical care a person can need, and Part A ensures that eligible Americans don’t face the full cost alone.
Nearly all of the money collected goes directly to patient care. In 2024, Medicare spent $1,109.8 billion on benefits and just $12.2 billion on administrative expenses, meaning overhead consumed roughly 1% of total spending. That’s far lower than the administrative costs of most private insurers.
It’s worth noting that Medicare tax does not fund all of Medicare. Part B (doctor visits and outpatient care) and Part D (prescription drugs) are financed mainly through general tax revenue and monthly premiums that beneficiaries pay. When you see the Medicare line on your pay stub, that money is going toward hospital-level care under Part A.
How Much You Pay
If you’re a W-2 employee, you pay 1.45% of your gross wages and your employer pays another 1.45%, totaling 2.9%. Unlike Social Security tax, which stops applying after a certain income level ($184,500 in 2026), Medicare tax has no earnings cap. Every dollar you earn is subject to it.
If you’re self-employed, you pay the full 2.9% yourself since there’s no employer to cover half. However, you can deduct the employer-equivalent portion (half of the total) when calculating your adjusted gross income, which softens the hit somewhat.
The Additional Medicare Tax for Higher Earners
An extra 0.9% Medicare tax kicks in once your earnings pass a certain threshold. For single filers, that threshold is $200,000. For married couples filing jointly, it’s $250,000. For married individuals filing separately, it’s $125,000. This additional tax applies only to the employee; employers don’t match it. So a single person earning $250,000 would pay the standard 1.45% on all earnings plus an extra 0.9% on the $50,000 above the threshold.
How the Hospital Insurance Trust Fund Works
Medicare tax revenue is deposited into the Hospital Insurance (HI) Trust Fund, which operates like a dedicated account. Money comes in from payroll taxes and goes out as payments to hospitals, nursing facilities, and hospice providers. When collections exceed expenses, the surplus is invested in government bonds. When expenses exceed collections, the fund draws on those reserves.
The fund’s financial health is measured by how long it can continue paying full benefits. According to the 2024 Medicare Trustees Report, the HI Trust Fund can pay 100% of scheduled benefits until 2036. That’s five years later than the previous year’s estimate of 2031, a significant improvement. If the fund’s reserves are depleted in 2036, incoming payroll tax revenue would still cover about 89% of benefits. Depletion doesn’t mean the program disappears; it means the trust fund would need to operate on current income alone, potentially reducing payments unless Congress acts.
Small annual surpluses are expected through 2029, but deficits are projected to return starting in 2030 and continue through the depletion date. The gap reflects a demographic reality: as more baby boomers retire, the ratio of workers paying in to beneficiaries drawing out continues to shrink.
Why It’s Separate From Social Security Tax
Your pay stub likely shows two federal withholdings that look similar: Social Security tax (6.2%) and Medicare tax (1.45%). They’re both part of the Federal Insurance Contributions Act (FICA), but they fund entirely different programs and flow into separate trust funds. Social Security tax pays for retirement, disability, and survivor benefits. Medicare tax pays strictly for hospital insurance. The two programs have different eligibility rules, different benefit structures, and different long-term financial outlooks.
The key practical difference for workers is the earnings cap. Social Security tax only applies to income up to a set limit, while Medicare tax applies to all earned income with no ceiling. High earners feel this distinction clearly: once you pass the Social Security cap, that withholding stops, but the Medicare withholding never does.