What Is Medicare Tax?

When it comes to funding health programs, the federal government aims to help the public with various expenses. Medicare receives the second-largest allocation of taxpayer dollars right after Social Security. Like Social Security, Medicare is a program that affects millions of Americans; about 18% of people in the U.S. rely on the services that the Medicare tax ends up paying for. So what is Medicare tax?

Read on to learn how Medicare helps make retirement less scary than you think.

What Is Medicare?

Medicare is a health insurance program for people who are 65 or older, younger people with certain disabilities and people who have permanent kidney failure requiring dialysis or a transplant.

Understand: Medicare vs. Medicaid: Health Plan Cost Differences You Need to Know

What Medicare Pays For

Medicare offers health coverage for people with disabilities and aging Americans. Specifically, the coverage is broken up into different parts and plans.

Medicare Part A covers hospital insurance, which includes inpatient hospital stays, care in a skilled nursing facility, hospice care and home healthcare. For Medicare Part A, you usually don’t have to pay a monthly premium if you meet certain requirements.

Medicare Part B is medical insurance that only covers outpatient care except for mental healthcare services, for which it also covers inpatient and partial hospitalization. Otherwise, Part B covers necessary outpatient medical services and supplies, preventative healthcare, ambulance service and limited outpatient prescription medications.

Original Medicare includes Part A and Part B.

There is also Medicare Part C and Part D. Medicare Part C, also known as Medicare Advantage Plans, is a selection of Medicare plans provided by companies approved by Medicare. They come in the form of HMOs and PPOs depending on which options the company offers and they must cover all services that original Medicare covers. And like true HMOs and PPOs, there are premium costs. However, these plans are beneficial because unlike Part A and Part B, they often offer specialized coverage in vision, hearing and dental. And lastly, Medicare Part D provides prescription drug coverage.

Keep in mind that you don’t have to stick to one plan forever; you can change your Medicare plan during any enrollment period. Medicare coverage makes up only a portion of health costs so you might need to find other monetary support to sustain your health costs if they exceed your budget and coverage.

Whoa: Jaw-Dropping Stats About the State of Retirement in America

How You’re Taxed for Medicare

If you want to know what the Medicare tax is, take a look at your paycheck today. You’ll find a portion of your earnings withheld to satisfy a tax requirement established by the Federal Insurance Contributions Act (FICA). Under FICA, employees and employers make a contribution — in the form of a tax on their weekly income — to fund Social Security and Medicare programs. For each pay period, employees and employers are both taxed 1.45 percent for Medicare, for a total of 2.9 percent.

Be Prepared: Everything You Need To Know About Taxes

What Is the Additional Medicare Tax?

Under the Affordable Care Act in 2013, an additional tax for high earners was added to fund Medicare. The additional Medicare tax rate is 0.9 percent. But this is not mandatory unless an “individual’s wages, compensation, or self-employment income (together with that of his or her spouse if filing a joint return) exceed the threshold amount for the individual’s filing status,” according to the IRS. See below if you meet the requirements for the additional Medicare tax.

More From GOBankingRates

• Here’s the Average IRS Tax Refund Amount by State

• 30 Biggest Do’s and Don’ts When Buying a Car

• 27 Ugly Truths About Retirement

• 17 Hidden Auto Costs Your Dealer Will Never Tell You About

Daria Uhlig contributed to the reporting for this article.

Last updated: Feb. 24, 2021

This article originally appeared on GOBankingRates.com: What Is Medicare Tax?