Summary: Medicare is a government assistance program in the US, available to individuals over the age of 65, funded from contributions over a working life.

Some countries like Canada and the UK have universal health care systems that are free for all citizens but funded through high tax rates. The situation in the US is different and a lot more complicated with private insurance and hospitals mixed together with mandatory social insurance programs. In this article, we’ll take a look at how Medicare fits into this system, what it provides, and how it’s funded by employers and employees.

What is Medicare?

Medicare is a federal medical insurance program in the United States administered by the CMS (Centers for Medicare and Medicaid Services). The Medicare system provides health care coverage mostly for people over the age of 65.

However, people who are under the age of 65 but have certain disabilities, end-stage renal disease (ESRD – in need of kidney dialysis), or suffer from ALS or Lou Gehrig’s Disease may also be eligible for coverage.

Medicare is divided into four parts, and most workers are automatically signed up for Parts A and B when they reach their 65th birthday.

Medicare Part A

Medicare Part A is hospital insurance and is based on their own earnings or those of a spouse. Workers who have made contributions for a minimum number of quarters are eligible for Part A without paying premiums while those who haven’t may need to pay premiums.

Medicare Part B

Part B is medical insurance and people who have already received Social Security benefits for four months are automatically enrolled in Part B. However, they can opt out if desired. Part B is voluntary and people enrolled must pay premiums for this coverage.

Medicare Part C

Part C is also known as Medicare Advantage and involves Medicare-approved health plans from private providers. Part C is optional. It normally includes all of Parts A and B coverage and may also include Part D coverage as well.

People enrolled in Part C plans still pay Part B premiums as well as premiums and usually deductibles for Part C. Part C plans cannot provide less coverage than original Medicare (Parts A and B) and enrollees pay premiums for benefits that exceed the original plan.

Medicare Part D

Part D is for prescription drug coverage and was only begun in 2006. Any person with Part A or B is eligible for Part D as well and can enroll in a prescription drug plan (PDP).

These plans do not have standardized costs and benefits, so people must choose their plans carefully according to their needs. Part D requires enrollees to pay premiums and is not covered by their contributions or those of their employers.

How is Medicare Funded?

Since the beginning of this program in 1965, Medicare has been partially funded through FICA or the Federal Insurance Contribution Act. Almost all employees working in the US pay mandatory deductions for FICA taxes that include Social Security and Medicare.

Together, employees pay 7.65% of their gross compensation toward these taxes, 6.2% for Social Security and 1.45% for Medicare. Employers withhold and remit these taxes and also make matching contributions themselves.

Therefore, the normal contribution amount for Medicare is 1.45% from the employee and 1.45% from the employer for a total of 2.9% of each employee’s wages.

Unlike Social Security, there is no wage-base limit for Medicare. This means that all of an employee’s gross earnings are taxed for Medicare. Instead of a wage-base limit, there is actually an Additional Medicare Tax for employees who earn more than $200,000 per year (or over $250,000 if they file their taxes jointly with their spouse).

While 1.45% of the first $200,000 of their wages is deducted for Medicare taxes, an additional 0.9% is added so that any earnings over $200,000 are taxed at 2.35%. However, employers are not liable to pay additional contributions and pay 1.45%.

Medicare tax revenues fund Medicare Part A as well as Part B for some enrollees. Most people, however, pay additional premiums for Parts B and D, or choose Part C plans that also require them to pay premiums, deductibles, and certain out-of-pocket (OOP) expenses. In fact, no part of Medicare covers 100% of an enrollee’s costs, and OOP expenses are still normal.

How to Calculate Medicare Tax

If you’re an employer, you’ll need to know how to calculate Medicare taxes that you are required to withhold from your employees’ paychecks. If you’re an employee, learning about Medicare calculations helps you check whether your employee or not your employer is withholding your salary correctly.

Thankfully, Medicare tax is easy to calculate following this formula:

Medicare tax = gross wages x 1.45%

This is the amount owed by the employee which is what the employer owes as well. Here are some examples to help you calculate these taxes. 

Semi-monthly Paycheck Medicare Tax Calculation

Employee A is paid semi-monthly (or 24 times per year) and makes a base salary of $60,000 with no additional earnings. Their calculation for one pay period would be:

Medicare tax = ($60,000/24) x 1.45%

                                                Medicare tax = $2,500 x 0.0145

                                                Medicare tax = $36.25

From each paycheck, Employee A’s employer should withhold $36.25 for Medicare contributions. The employer will also need to pay their own share of $36.25, so when they remit these taxes, they pay $72.50 to Medicare.

Monthly Paycheck Medicare Tax Calculation

Employee B makes $112,000 per year and is paid on a monthly basis (12 times/year). Their calculation would be:

Medicare tax = ($112,000/12) x 1.45%

                                                 Medicare tax = $9,333.33 x 0.0145

                                                 Medicare tax = $135.33

Employee B’s employer would need to withhold $135.33 from their paycheck and also contribute a matching amount to Medicare each month.

Additional Medicare Tax Calculation

Employee C is an upper-level manager who brings in a salary of $230,000 per year. Since this is over $200,000, they must pay Additional Medicare on the extra $30,000 in gross income. Employee C’s Medicare obligation for the entire year would be:

Medicare tax = ($200,000 x 1.45%) + ($30,000 x 2.35%)

                                Medicare tax = $ 2,900 + $705

                                Medicare tax = $3,605

Employee C would have to pay $3,605 in Medicare tax for the whole year. 

However, their employer’s contributions would be different as they’re not required to make additional contributions. The employer’s calculation for the same salary would be:

                               Medicare tax = $230,000 x 1.45%

                               Medicare tax = $230,000 x 0.0145

                               Medicare tax = $3,335

Because the employer doesn’t pay the Additional Medicare tax, their contribution would be lower at $3,335 for the year.

How to Enroll in Medicare

Workers approaching the age of 65 are automatically enrolled in Medicare Part A and Part B, though they can opt out of Part B if they choose or they can choose instead to enroll in Part C plans. People who are not automatically enrolled can choose to enroll in Parts A and B or Part C plans. People enrolled in Part A or B are allowed to enroll in Part D.

Here’s how enrollment works:
Type of Enrollment Enrollment Period What you can do:
Initial enrollment Starts three months before your birth month, includes the birth month, and runs for three months after
  • Join any plan, but you need Parts A and B to join a Part C  (Advantage) plan, and either A or B to join a Part D (drug) plan
New to Part B Starts three months before you’re first eligible for Part B and runs for two months after you have A and B
  • Join any Medicare Advantage (Part C) plan
Open Enrollment October 15th – December 7th
  • Join, drop, or change Medicare Advantage plans
  • Add or drop drug coverage
  • Change between Original Medicare and Medicare Advantage plans
Medicare Advantage Open Enrollment January 1st – March 31st Or within your first three months after you get Medicare
  • Change Medicare Advantage plans
  • Change from Medicare Advantage back to Original Medicare
Special Enrollment Periods Based on qualifying life events like moving or temporarily losing Medicare coverage
  • Change plans
  • Join Medicare Advantage plans

Medicare Summarized

Medicare is a health insurance program for people over 65 or younger people with certain disabilities and health conditions. Employers are required to withhold Medicare taxes from their employees’ salaries and make matching contributions as well, though these funds don’t cover all expenses. Eligible people can enroll in different parts of Medicare at different times to choose the coverage that best fits their needs.

FAQ

In some states and cities, public sector employees can be exempted from paying Medicare taxes if their governments provide them with equal or greater benefits through other programs. Students who work at the institutions where they study can also be exempt, as can members of tribal councils of recognized Native American groups, members of religious groups that don’t believe in insurance, and some non-resident aliens working temporarily in the US. People who don’t work also don’t need to pay Medicare taxes.

Medicare provides health care coverage for adults over 65 and some younger disabled people. In contrast, Medicaid provides health care coverage to low-income adults and children.