Which Taxes Provide for Medical Benefits?

How Payroll Taxes Fund Medical Benefits

The Federal Insurance Contributions Act (FICA) is a payroll tax applied to most earned income in the U.S. Both employees and employers pay FICA taxes. For 2025, employees pay a total FICA rate of 7.65%—6.2% for Social Security and 1.45% for Medicare.

Individuals who are self-employed are expected to pay both the employee and the employer’s portions of the FICA tax contributions with their federal income tax return. As a result, the self-employed tax rate is much higher at 15.3%. 12.4% is withheld for Social Security, and 2.9% is for Medicare taxes.

The purpose of paying these payroll taxes is to help provide essential benefits for some of the most vulnerable among us, including disabled individuals who may qualify for disability insurance, survivors of deceased workers, and retirees.

Most of an employee’s pay is subject to mandatory FICA taxes, with a few exceptions. Pre-tax withholdings are not subject to these taxes. Certain types of income, such as qualified pre-tax deductions, are excluded from FICA taxes. Most regular wages, however, remain fully subject to Social Security and Medicare taxes.

Next Steps: If you’re an employee, your employer automatically withholds and pays FICA taxes for you. If you’re self-employed, make sure your quarterly estimated payments include Social Security and Medicare taxes.

How Medicare Is Funded (And Where the Money Goes)

Medicare is a critical health insurance program designed to support citizens over the age of 65 and younger individuals who are coping with disabilities or serious medical conditions. This program is divided into four parts:

• Part A: Hospital Insurance
• Part B: Medical Insurance
• Part C: Medicare Advantage
• Part D: Prescription Drug Coverage

The Medicare tax is regulated by Congress, which authorizes the funds to be distributed. Medicare Part A funding comes from payroll taxes paid by every working citizen. Funds also come from interest earned on trust fund investments, income taxes paid on Social Security benefits, and Medicare Part A premiums paid by people who aren’t eligible for premium-free coverage.

Workers are eligible to receive benefits from Medicare once they’ve worked for 40 quarters, or 10 years, and paid into taxes. Medicare Parts B and D are primarily funded by general revenues and participant premiums. Medicare Part C (Medicare Advantage) is funded through payments from Medicare to private insurers, which are themselves supported by Parts A and B funding.

So What?: Understanding where your tax dollars go and how they cover the healthcare costs of the most vulnerable citizens helps reassure taxpayers that their tax payments are going to a good cause.

Source: Medicare.gov Funding Overview

What Is the Additional Medicare Tax?

In some unique situations, taxpayers are obligated to pay an additional Medicare tax (0.9%). This extra tax is imposed only on high-income individuals. For 2025, that threshold was:

• Married Filing Jointly: $250,000
• Married Filing Separately: $125,000
• Single, Head of Household, or Qualifying Widower: $200,000

Once you start earning over $200,000, your employer will begin withholding the additional tax regardless of your filing status. The additional Medicare tax is imposed only on income that exceeds the threshold amount, not on income earned before exceeding that threshold. You will calculate your ultimate liability once you officially file your tax return.

For more guidance, you can refer to IRS Form 8959 Instructions, which goes over in detail exactly how to calculate the additional Medicare tax you owe.

One thing to note is that medical pre-tax contributions are not included in the income limit cap. Any pre-tax contributions made by the employee will not be included in their taxable income and will not affect the additional Medicare tax requirement.

IRS Pub 15 (Circular E) is a resource guide used by all employers to help them identify the appropriate tax rates to apply to employees and their own withholding rates. If you have more questions or concerns about the payroll taxes you’re subject to, then this guide will help you find the answers.

Next Step: Review your total income and filing status to see if the additional Medicare tax applies to you. If it does, you’ll report it using Form 8959 when you file your tax return.

Social Security vs. Medicare: Key Tax Differences

Social Security and Medicare are both funded through payroll taxes, but they serve very different purposes.

Social Security is designed to replace income. It provides ongoing financial support for retirees, people with disabilities, and surviving family members of deceased workers. Because these benefits are often paid monthly over many years, the program requires a larger share of payroll tax funding.

Medicare, on the other hand, is focused on healthcare coverage. It helps pay for hospital stays, doctor visits, and other medical services for eligible Americans—primarily those aged 65 or older, as well as certain younger individuals with qualifying conditions. Medicare taxes apply broadly to earned income to help ensure consistent funding for healthcare costs.

In short, Social Security supports financial security, while Medicare supports medical care. Both are mandatory payroll taxes, and both play a critical role in protecting individuals as they age or face health challenges.

Below is a side-by-side comparison of Social Security and Medicare, highlighting their funding, benefits, and eligibility.

FICA Comparison Table: Social Security vs. Medicare

During a typical pay period, the combined Medicare and Social Security tax withholding should be 7.65%.

Next Steps: Knowing which taxes fund which benefits helps you understand what’s being withheld from your paycheck and why. Use this breakdown to better plan for retirement and healthcare costs.

Where Medicare and Social Security Taxes Appear on Your Paystub

When you receive your pay stub, you can see a payroll tax breakdown in the deductions section. Some employers list out your FICA taxes as a combined item, but others break them out into Social Security and Medicare withholdings.

Your gross pay shows your total earnings before any money is taken out, while your net pay reflects the amount of your paycheck you actually receive after your taxes are paid.

At the end of the year, you’ll want to verify your FICA tax withholding amounts by analyzing the W-2 you receive. Box 4 will outline exactly how much Social Security tax was withheld from your pay throughout the year. This figure should equal 6.2% of your wages. Box 6 will outline exactly how much you paid in Medicare taxes. This amount should be 1.45% of your overall wages, but it might include the additional 0.9% tax if you were paid over $200,000 that tax year.

Next Steps: Check your paystub and W-2 to confirm Social Security and Medicare taxes were withheld correctly. If something looks off, contact your employer or payroll provider as soon as possible.

Which Tax Provides for Medical Benefits?

FICA taxes fund both retirement and medical benefits, ensuring eligibility for Medicare and Social Security. Knowing what each tax supports can help you plan for future coverage.

Explore our Medical Expenses and Health Tax Deductions Guide to learn more about the impact of medical events on your taxes.