Medicare taxes were established in 1966 as a way to fund Medicare Hospital Insurance for seniors. The tax started out as only 0.7% of an employee’s earnings, split between the employee and the employer. This tax, however, has gradually increased over the years. Today, the Medicare tax stands at 2.9%. There is no limit on the compensation or earnings made during the year. The government has also established additional taxes to help pay for the Medicare Hospital Insurance fund including the Additional Medicare Tax and the Net Investment Income Tax (NIIT). The NIIT is also referred to as the Unearned Income Medicare Contribution Surtax.

A self-employed individual will pay for Medicare tax as part of their Self-Employment Tax. The Self-Employment Tax is made up of both the Social Security and Medicare Tax. Individuals who are employed by a company or entity will have FICA taxes automatically reduced from their paychecks. Similar to the Self-Employment Tax, the FICA tax is made up of the Social Security and Medicare Tax. Employers are required to pay half of the FICA taxes on behalf of their employees. Unlike the Social Security Tax, Medicare Tax is owed on all combined wages, tips, and net earnings. Employers must pay FICA taxes for anyone earning more than $400 in a year.

Since there is no limit to the earnings subject to Medicare Taxes, higher earners usually pay more towards these taxes. In 2013, the Affordable Care Act (ACA) created an Additional Medicare Tax for high earners. This tax rate is currently 0.9% and applies to earnings greater than $200,000 for individuals or $250,000 for married couples filing jointly. The current NIIT rate is 3.8% on investment income in excess of $200,000 a year. An individual may be subject to all three types of Medicare Tax depending on their combined gross wages, tips, and investments.