How Medicare is funded

Medicare is paid for through a combination of your payroll taxes, your monthly premiums, and general federal tax revenue. You and your employer each contribute a percentage of your wages to Medicare while you work, and when you turn 65, those contributions help fund your coverage. The program also draws on money Congress appropriates each year from the general Treasury.

Understanding who pays what helps you see why your Medicare costs what they do and why different parts of Medicare have different funding sources. The breakdown is straightforward: Part A (hospital insurance) and Part B (medical insurance) are funded differently, and Part D (prescription drug coverage) has its own structure.

Key Takeaways

  • You and your employer each pay 1.45% of your wages into Medicare payroll taxes while you work, with no income cap.
  • Part A is funded mainly by payroll taxes you paid during your working years; Part B is funded by premiums, general tax revenue, and your contributions.
  • If you earn over $200,000 as a single filer (or $250,000 married filing jointly), you pay an additional 0.9% Medicare tax on income above that threshold.
  • Your monthly Part B and Part D premiums come directly from your Social Security check or are billed to you, and these amounts change yearly based on your income.
  • Self-employed people pay both the employee and employer share of Medicare tax — 2.9% total — though they can deduct half on their tax return.

Payroll taxes: the foundation of Part A funding

While you work, you and your employer each contribute 1.45% of your wages to Medicare. This money goes into a trust fund that pays for Part A benefits — hospital stays, skilled nursing care, hospice, and home health services. Unlike Social Security, there is no wage cap on Medicare taxes, so high earners pay the same percentage as everyone else.

These payroll contributions are withheld from your paycheck automatically. Your employer matches your contribution, meaning the total going into Medicare is 2.9% of your wages. When you turn 65 and become may be able to access for Medicare, Part A coverage is largely free because you have already paid for it through these years of contributions.

If you worked for at least 10 years and paid Medicare taxes, you do not pay a monthly premium for Part A. If you worked fewer than 10 years, you can still get Part A by paying a monthly premium, which varies based on how many quarters of coverage you have.

The additional Medicare tax for higher earners

If your income exceeds certain thresholds, you pay an extra 0.9% Medicare tax on the amount over the limit. For single filers, the threshold is $200,000 per year. For married couples filing jointly, it is $250,000. For married people filing separately, it is $125,000.

This additional tax applies to wages, self-employment income, and certain investment income. Your employer withholds it automatically if you earn over the threshold as a W-2 employee. If you are self-employed or have investment income, you may owe it when you file your tax return.

Part B and Part D: premiums and general revenue

Part B (medical insurance covering doctor visits, outpatient care, and preventive services) is funded through three sources: your monthly premiums, general federal tax revenue, and the payroll taxes you paid while working. Your Part B premium is deducted from your Social Security check each month, or you receive a bill if you are not yet collecting Social Security.

The standard Part B premium changes each year. In 2024, the base premium was $164.90 per month, though higher earners pay more based on their income from two years prior. This is called Income-Related Monthly Adjustment Amount (IRMAA), and it means your Part B cost depends on your tax return from the previous year.

Part D (prescription drug coverage) is offered through private insurance companies, but the federal government subsidizes the cost. You pay a monthly premium to your plan, and the government covers a portion of your drug costs. Like Part B, your Part D premium may increase if your income is high.

Self-employed workers and Medicare taxes

If you are self-employed, you pay both the employee and employer share of Medicare tax — 2.9% total on your net self-employment income. This is higher than the 1.45% a W-2 employee pays because you are covering both sides of the contribution.

The good news is that you can deduct half of your self-employment Medicare tax on your income tax return, which reduces your taxable income. You also pay the additional 0.9% Medicare tax on self-employment income above the same thresholds that explore to W-2 workers.

Self-employed people should set aside money for Medicare taxes when they receive income, since there is no automatic withholding. Many use quarterly estimated tax payments to cover both income tax and self-employment tax throughout the year.

How much of your premiums go to actual coverage

Your Part B and Part D premiums cover only a portion of the actual cost of your care. The federal government pays the rest from general tax revenue. For Part B, beneficiaries pay roughly 25% of the cost through premiums, and the government covers the remaining 75% from tax dollars.

This is why your Part B premium does not rise as steeply as healthcare costs do — Congress sets a cap on how much the premium can increase each year. The difference is made up by general federal revenue, which means all taxpayers contribute to Medicare even if they are not yet may be able to access.

Part A is different: the payroll tax you paid while working is meant to cover most of your hospital costs. If the Part A trust fund runs low, Congress may need to adjust the payroll tax rate or reduce benefits, though this has not happened in recent decades.

Income-based premiums and how they work

If your income is above certain levels, you pay higher premiums for Part B and Part D. The income thresholds for 2024 were $103,000 for single filers and $206,000 for married couples filing jointly. If you exceed these amounts, your premium increases in steps based on how much higher your income is.

The income used to calculate your premium is your Modified Adjusted Gross Income (MAGI) from your tax return from two years before. So in 2024, Medicare looked at your 2022 tax return. If your income drops significantly — such as after retirement — you can notify Social Security and ask for a recalculation.

Higher-income beneficiaries may pay two to three times the standard Part B premium. Part D premiums also increase with income, though the structure varies by plan. These adjustments are designed so that people with higher incomes contribute more to their own coverage.

What happens if you delay Medicare enrollment

If you do not sign up for Part B when you first become may be able to access at 65, you may owe a late enrollment penalty for as long as you have Medicare. The penalty is 10% of the Part B premium for each 12-month period you were not covered. This penalty is permanent and applies to your premium every month.

The same applies to Part D: if you go without prescription drug coverage for more than 63 days and then enroll later, you pay a penalty. These penalties are designed to encourage people to sign up on time, since the program relies on healthy people enrolling to keep costs down.

There are exceptions if you had other health coverage or meet certain criteria, but the general rule is that delaying costs you more in the long run. The enrollment period around your 65th birthday is the key window to sign up without penalty.

Frequently Asked Questions

Do I pay Medicare taxes after I turn 65?

Yes. If you continue working after 65, you and your employer still pay 1.45% Medicare tax on your wages (plus the additional 0.9% if your income is high enough). This continues for as long as you work, even if you are already receiving Medicare benefits.

Can I get a refund of my Medicare taxes if I don't use Medicare?

No. Medicare taxes are not refundable. They go into a trust fund that pays for the entire program, and you cannot opt out or reclaim your contributions. However, if you have high income and do not need Medicare benefits, you can choose not to enroll in Part B or Part D, though you will still pay the payroll tax.

Why does my Part B premium change every year?

Part B premiums increase each year to reflect rising healthcare costs. Congress also adjusts the premium based on the cost-of-living adjustment (COLA) applied to Social Security. Additionally, if your income increases, your premium may jump due to income-related adjustments.

What if I worked outside the United States — do those years count toward Medicare?

Generally, only work in the United States where you paid Medicare taxes counts toward your 10-year requirement for free Part A coverage. Some countries have agreements with the U.S. that allow certain work to count, but you should contact Social Security to verify your specific situation.

Is there a way to lower my Medicare premiums if my income is high?

If your income dropped significantly — such as after retirement or a job loss — you can ask Social Security to recalculate your income-related premium using your current year's income instead of the two-year-old tax return. You will need to provide documentation of the change.