What Are Medicare Wages?
Medicare wages are the parts of your pay that are subject to Medicare tax. They generally include salary, hourly pay, overtime, bonuses, commissions, and reported tips. Unlike Social Security wages, there’s no annual cap for Medicare tax—so all covered earnings are taxed.
What counts as Medicare wages in 2025?
- Most cash compensation: salary, hourly pay, overtime, bonuses, commissions, awards.
- Reported tips (cash tips ≥ $20 in a month, per employer).
- Employee 401(k) deferrals still count for FICA/Medicare even though they’re pre-tax for income tax.
Common items that generally reduce Medicare wages (when run through a Section 125 “cafeteria plan”): employee pre-tax health premiums, health FSA contributions, and employer/employee HSA contributions made via the cafeteria plan. (There are exceptions—e.g., certain fringe benefits like adoption assistance can be subject to FICA/Medicare.)
Where are Medicare wages shown on my W-2?
They appear in Box 5 (“Medicare wages and tips”). Employers also report any Medicare tax withheld in Box 6. The 2025 W-2 instructions reiterate the 1.45% base rate and the 0.9% Additional Medicare Tax withholding rules over $200,000.
How are Medicare wages taxed in 2025?
- Employee rate: 1.45% on all covered wages (no cap).
- Employer match: 1.45%.
- Self-employed: pay both halves (2.9%) via SE tax.
- Additional Medicare Tax (AMT): extra 0.9% on the employee portion above $200,000 (any status for employer withholding), $250,000 if married filing jointly, $125,000 if married filing separately. You reconcile on Form 8959.
How do Medicare and Social Security wages differ?
| Social Security | Medicare | |
|---|---|---|
| 2025 wage base | $176,100 cap | No cap |
| Employee rate | 6.2% | 1.45% |
| Employer match | 6.2% | 1.45% |
| Additional surtax | None | +0.9% on employee share above thresholds |
SSA confirms the 2025 Social Security wage base at $176,100.
Example: calculating Medicare tax for a high earner in 2025
Scenario: Single filer earns $250,000 in Medicare wages.
- Base Medicare (1.45%) on $250,000 = $3,625
- Additional 0.9% on $50,000 (amount over $200,000) = $450
- Total employee Medicare tax = $4,075; employer still pays 1.45% on full $250,000 ($3,625).
Do tips change anything?
Yes. You must report cash tips of $20 or more in a calendar month to your employer; those tips become part of Medicare wages (and Social Security wages up to the SS cap). Under-reporting can lead to under-withholding and penalties.
Why this matters to the insurance industry
- Benefits strategy & payroll cost: Moving eligible employee deductions into a Section 125 plan (e.g., health premiums, health FSA, HSA via cafeteria plan) reduces taxable payroll for FICA/Medicare—lowering employer Medicare tax outlay (1.45%) while boosting employee net pay. Brokers and agencies can quantify this in RFPs and renewals.
- Group plan design: Cafeteria plan compliance (e.g., 2025 health FSA salary reduction limit $3,300) ties into enrollment, payroll, and ERISA documents—affecting administration and employee experience.
- Medicare financing context: Because Medicare has no wage cap, payroll growth increases funding; policy discussions about taxing more forms of compensation (e.g., employer health benefits) or changing caps can influence premiums and product strategy across Medicare Advantage, Medigap, and group retiree plans.
FAQ: quick answers
Does my 401(k) lower Medicare wages? No. 401(k) deferrals are still subject to FICA/Medicare.
Do pre-tax health premiums lower Medicare wages? Usually yes—when taken through a compliant Section 125 plan. Confirm your payroll setup.
Are HSA contributions subject to Medicare tax? Employer HSA contributions (including employee salary reductions via a cafeteria plan) are generally excluded from Medicare wages.
When must employers withhold the 0.9% surtax? In any pay period after an employee’s year-to-date wages exceed $200,000, regardless of marital status; the employee reconciles on Form 8959.
Where do I see my numbers? W-2 Box 5 (Medicare wages and tips) and Box 6 (Medicare tax withheld).
Why do my Social Security wages (Box 3) and Medicare wages (Box 5) differ? Box 3 stops at the annual SS wage base; Box 5 has no cap and may be reduced by cafeteria-plan deductions.
Compliance & payroll checklist
- Verify 2025 rates and the SS wage base in your payroll system (6.2% up to $176,100; Medicare 1.45% uncapped).
- Confirm W-2 mapping: Boxes 3, 5, 6, and tip reporting workflows.
- Audit cafeteria plan elections (POP, health FSA, HSA via Section 125) to ensure proper FICA/Medicare treatment and the 2025 FSA limit ($3,300).
- Prepare high-earner communications on the 0.9% Additional Medicare Tax and Form 8959.
Sources & further reading
- Social Security Administration — Contribution & Benefit Base (2025)
- IRS Topic No. 751 — Social Security & Medicare Withholding Rates (2025)
- IRS Topic No. 560 — Additional Medicare Tax (0.9%)
- IRS — Publication 15 (Circular E), Employer’s Tax Guide (2025)
- IRS — General Instructions for Forms W-2 & W-3 (2025)
- IRS — 401(k) Resource Guide (FICA treatment)
- IRS — Tip Recordkeeping & Reporting
- IRS — Publication 15-A (2025), Employer’s Supplemental Tax Guide
- IRS — Cafeteria Plan FAQs (Section 125 & FICA)
- IRS — Publication 15-B (2025), Fringe Benefits
- IRS — W-2 Reporting of Employer-Sponsored Health Coverage
- Context on policy debate — How taxing ESI could affect Social Security/Medicare funding
This article is for general education only. Employers and insureds should consult their payroll provider, tax advisor, or licensed insurance professional for advice specific to their situation.
Danielle Green
