Medicare 2026

Where Medicare's Money Comes From: Payroll Taxes, Premiums and General Revenue

Medicare is one of the largest programs the federal government runs, and it's funded from several streams at once. If you've ever wondered why a Medicare tax comes out of your paycheck, why Part B has a premium, or how the government covers the rest, this explainer walks through the pieces. The goal is to help you understand the financing in plain English so the headlines about Medicare's budget make more sense.

The big picture: a $1.2 trillion program

According to the 2026 Medicare Trustees Report (dated June 9, 2026), Medicare brought in $1,226.2 billion in calendar year 2025 and spent $1,210.1 billion. That income came from several sources: government contributions of $572.9 billion, payroll taxes of $403.2 billion, beneficiary premiums of $171.5 billion, income taxes on Social Security benefits of $41.1 billion (credited to Part A), payments from states of $19.1 billion, interest of $13.0 billion, and other income of $5.4 billion.

Said another way, the Trustees report that in 2025 transfers from the general fund of the U.S. Treasury made up 47 percent of Medicare's non-interest income — and have been Medicare's largest source of financing since 2009. Part A payroll taxes made up 33 percent, and beneficiary premiums made up 14 percent.

Part A: funded mainly by payroll taxes

Part A (hospital insurance) is largely paid for while you're working. According to the IRS, the Medicare tax rate is 1.45 percent of wages for the employee and 1.45 percent for the employer, for a total of 2.9 percent. Self-employed people pay the full 2.9 percent as part of self-employment tax. Unlike Social Security tax, Medicare tax has no wage base limit — it applies to all covered wages.

Higher earners also pay an Additional Medicare Tax of 0.9 percent. According to the IRS, that extra tax applies to wages and self-employment income above $200,000 for single filers, $250,000 for married couples filing jointly, and $125,000 for married people filing separately. Employers don't match this piece. The Trustees point out that these thresholds are not indexed to inflation, which means more workers reach them over time as wages rise.

Those payroll taxes are what let most beneficiaries skip a Part A premium later. According to CMS, about 99 percent of Medicare beneficiaries do not pay a Part A premium because they have at least 40 quarters of Medicare-covered employment. Part A is also where income taxes on Social Security benefits (another $41.1 billion in 2025) are credited.

Parts B and D: premiums plus general revenue

Part B (outpatient care and doctor visits) and Part D (prescription drugs) work differently. According to the Trustees, government contributions covered about 75 percent of Parts B and D costs in 2025, and beneficiary premiums covered about 22 percent. In other words, your Part B and Part D premiums only pay for part of the actual cost — general tax revenue picks up most of it.

The standard Part B premium is set each year at about 25 percent of the expected average total cost of Part B coverage for enrollees 65 and older. CMS announces the 2027 Part B standard premium and deductible in the fall, usually in November, along with the income-related monthly adjustment amount (IRMAA) brackets that apply to higher-income beneficiaries. Once released, those figures will be posted on Medicare.gov.

For Part D, the Trustees note that from 2024 through 2029, the Part D base beneficiary premium is the lesser of 25.5 percent of expected total plan costs for basic Part D coverage or the prior year's base premium increased by 6 percent. For 2027, the Part D base beneficiary premium is $41.33. That's a national figure used in the late-enrollment penalty; the premium you actually pay depends on the plan you choose. States also make payments to Part D on behalf of people who have both Medicare and full Medicaid benefits — that's the $19.1 billion "payments from states" line in the Trustees Report.

What's changing for 2027

A few program-level numbers are already set for 2027. The Part D out-of-pocket cap rises to $2,400 (it's $2,100 in 2026), and the most any Part D plan may charge as a deductible is $700. The Social Security Administration announced on October 14, 2026 a 3.6 percent cost-of-living adjustment (COLA) for benefits payable beginning January 2027. Annual Enrollment (also called Open Enrollment) for 2027 coverage runs October 15 – December 7, 2026, with choices taking effect January 1, 2027.

Extra Help and dual-eligible rules

If you have Medicaid or qualify for Extra Help with Part D costs, you have a monthly Special Enrollment Period to move to Original Medicare with a stand-alone Part D plan, or to switch stand-alone Part D plans. If you're a full-benefit dual-eligible — meaning you have both Medicare and full Medicaid — you can join an integrated Dual Eligible Special Needs Plan (D-SNP) in any month.

Advantage vs. Original Medicare + Medigap: a neutral note

Medicare Advantage plans are paid by the government on a per-member basis and typically bundle hospital, medical and often drug coverage with their own network and cost-sharing rules. Original Medicare paired with a stand-alone Part D plan and, if you choose, a Medigap policy, uses a different cost structure: Medicare pays providers directly, and Medigap can help with out-of-pocket costs. Each path has trade-offs around networks, cost predictability, extra benefits, and flexibility. Only you can decide which fits your situation.

Where to go next

For current premium amounts, IRMAA brackets once released, enrollment deadlines, and plan comparisons, visit Medicare.gov or call 1-800-MEDICARE (1-800-633-4227), available 24/7.