Medicare is the largest federal healthcare program in the United States, covering over 67 million people as of 2026, and the second-largest line item on most payroll tax deposits after Social Security. From an employer payroll perspective, Medicare taxation is simpler than Social Security (no wage cap, no annual reset) but trickier in one key way: the 0.9 percent Additional Medicare Tax that kicks in at $200,000 is withheld but not matched by the employer, so the deposit and reporting mechanics work differently than standard FICA.
How Medicare Is Funded Through Payroll The base Medicare tax is 1.45 percent on both the employee side and the employer side, applied to all wages with no cap. A worker earning $40,000 and a worker earning $4 million both pay 1.45 percent on every dollar. The combined Medicare tax from both sides is 2.9 percent of wages, deposited along with federal income tax withholding on the standard EFTPS schedule.
The Additional Medicare Tax, enacted under the Affordable Care Act and effective since 2013, imposes an extra 0.9 percent on employee wages over $200,000 (single filer), $250,000 (married filing jointly), or $125,000 (married filing separately). The employer withholds the 0.9 percent once cumulative wages for a given employee exceed $200,000 in a calendar year, regardless of filing status. The employee then trues up on their personal tax return.
What the Medicare Payroll Tax Funds Medicare has four parts. Part A covers inpatient hospital care and is funded almost entirely through the Medicare payroll tax (the tax on your paycheck). Part B covers outpatient services and is funded through general revenue and beneficiary premiums. Part C (Medicare Advantage) and Part D (prescription drug coverage) are private plans that integrate with the core Medicare framework.
The Medicare payroll tax specifically funds the Hospital Insurance trust fund (Part A). The trust fund's solvency has been a long-running budget issue, with projections varying year to year. The 2025 Medicare Trustees Report projected the Part A trust fund running short in the early 2030s, depending on wage growth and healthcare cost trends.
Who Is Eligible for Medicare Coverage? Three categories. People age 65 and older who have worked (or whose spouse has worked) and paid Medicare taxes for at least 10 years qualify for Part A at no premium. People under 65 with qualifying disabilities who have received Social Security Disability Insurance for 24 months automatically enroll. People of any age with end-stage renal disease or ALS qualify immediately.
Do All Employees Pay Medicare Tax? Most do. The major exceptions are certain state and local government employees hired before 1986 (grandfathered under older rules), some non-resident alien students on F or J visas, and some religious-exempt employees. For the vast majority of U.S. workers, Medicare tax applies to every dollar of wages.
Employer Reporting and Deposit Responsibilities Medicare tax is reported quarterly on Form 941 and annually on Form W-3. Each employee's W-2 breaks out Medicare wages (Box 5) and Medicare tax withheld (Box 6) separately from Social Security wages and tax.
Deposits follow the same EFTPS schedule as federal income tax withholding and FICA. Late deposits trigger the 2 to 15 percent penalty structure depending on how many days late. The Additional Medicare Tax is reported with Medicare tax on Form 941 but is not matched by the employer, so the employer's side stays at 1.45 percent on all wages. This produces a slight imbalance at year-end reporting that the forms accommodate automatically.
Coordinating Medicare With Employer Health Benefits in 2026 Beyond payroll tax, Medicare interacts with employer health plans in ways HR teams should understand. Active employees age 65 and older often have the option to stay on the employer plan or move to Medicare; Medicare Secondary Payer rules govern which pays first for employers of 20 or more. COBRA beneficiaries approaching 65 need guidance on Medicare enrollment timing to avoid gaps and late-enrollment penalties. And retiree medical plans coordinate with Medicare differently depending on whether they're primary or supplemental.
For related payroll and benefits concepts, see FICA , Medicare Wages and Tips , and Social Security . The Social Security Administration and CMS publish Medicare payroll tax details at ssa.gov and cms.gov , and the IRS publishes the Additional Medicare Tax rules in IRS guidance .
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