Do You Pay Medicare Tax on Retirement Income?

Whether you work for another company or are self-employed, you pay taxes. This is true regarding the Medicare tax, a percentage of gross income that employees, employers, and the self-employed must pay to fund Medicare.

But what happens when you retire? Do you still pay Medicare taxes on pension income? Do you pay Medicare taxes on your social security income? Mostly, you don’t have to pay Medicare tax on retirement benefits or investment income. Medicare taxes are lumped under the Federal Insurance Contributions Act or FICA. FICA (and Medicare taxes) apply only to earned salary or wages, not retirement income. But if you continue to work part-time or remain self-employed, you’ll continue to pay Medicare taxes.

No Medicare Tax, But . . .

When you retire, you’ll likely depend on income from retirement savings, pension funds, or Social Security payments. These aren’t subject to Medicare or FICA taxes. But be on the lookout for taxes on retirement income like the following.

IRA or 401(k) Plans

Individual Retirement Accounts or 401(k) plans can be helpful when saving for retirement. But you’ll need to pay taxes on the initial contributions (through a Roth IRA) or upon withdrawal (from a traditional IRA or other similar qualified contribution plan). Roth IRAs are funded with after-tax dollars, meaning you pay the ordinary income tax rate on those contributions. But the post-retirement withdrawal is tax-free.

With a traditional IRA, withdrawals are taxed at an ordinary income tax rate, depending on your tax bracket. You also must take distributions at age 72.

Social Security

Here’s an interesting fact. Your Social Security benefits can be taxed if your overall income exceeds $25,000 per year (if single) or $32,000 (if married, filing jointly). This might include Social Security benefits, income from retirement accounts, or a part-time job. If your sole income is only from Social Security, you won’t pay taxes on those payments. While your Medicare premium will be deducted from your Social Security earnings, you won’t pay Medicare or FICA taxes.

The Exceptions

Deferred Compensation

One area in which you might have to pay Medicare tax is deferred compensation. Deferred compensation is part of your salary that might be paid out later. Because you don’t receive that income immediately, you don’t pay taxes. But if you start collecting that income after retirement, you could end up with a hefty tax bill, including Medicare and Social Security taxes.

Factoring in IRMAA

One factor to watch for with Medicare taxes is the Income-Related Monthly Adjusted Amount, or IRMAA for short. IRMAA is part of the Medicare Modernization Act of 2003 (and later updated through the Affordable Care Act of 2010). Sometimes known as the “Medicare tax,” IRMAA impacts Medicare Part B enrollees with higher incomes. 

You could be on the hook for the IRMAA surcharge if your modified adjusted gross income (MAGI) is $97,000 or higher as a single filer or $194,000 or higher if married filing jointly. While strictly not a FICA-supported Medicare tax, you could pay extra for Medicare if your income exceeds a certain threshold.

FICA, Medicare, and Retirement

Once you stop earning a salary or wages in retirement, you likely won’t have to pay FICA on retirement income. In most cases, you also won’t have to pay Medicare taxes on your retirement income.

While you don’t necessarily pay FICA anymore, taxes are involved in pension withdrawals, Social Security, and Medicare benefits. Work with your financial advisor and tax professional to better prepare for how much tax you might owe.