In 2025, understanding Medicare wages and tips is essential for employers managing payroll and compliance. These wages represent the portion of employee pay that’s subject to Medicare tax under the Federal Insurance Contributions Act (FICA).
Unlike Social Security wages, Medicare wages have no annual cap—meaning every dollar of covered earnings is taxed. That includes base salary, bonuses, overtime, and certain pre-tax deferrals.
What Are Medicare Wages?
Medicare wages include nearly all forms of compensation an employee receives, as long as they are subject to FICA. This covers salary, hourly pay, commissions, overtime, bonuses, and reported tips.
Even though some deductions—like pre-tax health premiums—can reduce Medicare taxable wages, others, such as 401(k) contributions, do not. This distinction often surprises employers and employees alike.
In short, Medicare wages meaning refers to the total compensation that’s subject to the 1.45% Medicare tax rate. Because there’s no wage cap, all covered income is taxed, regardless of how high an employee’s earnings are.
What Counts as Medicare Wages?
For 2025, the following are included as Medicare taxable wages:
- Salary, hourly pay, overtime, bonuses, commissions, and cash awards
- Reported tips of $20 or more in a month (per employer)
- 401(k) or 403(b) deferrals (still subject to FICA/Medicare even though they’re pre-tax for income tax)
Certain deductions can reduce taxable wages when processed under a Section 125 “cafeteria plan,” including employee pre-tax health premiums, health FSA contributions, and HSA contributions made via payroll.
Excluded items may include employer-provided health coverage and certain qualified fringe benefits, depending on how they’re structured.
What Is Medicare Wages and Tips?
Medicare wages and tips refer to all income subject to Medicare tax, as shown in Box 5 of the employee’s W-2. The total tax withheld appears in Box 6.
Employers must apply:
- 1.45% employee rate (on all covered wages, no cap)
- 1.45% employer match (for a combined 2.9%)
- 0.9% Additional Medicare Tax withheld on employee earnings above $200,000 per year (for any filing status)
Employees reconcile the additional 0.9% on IRS Form 8959 if total household income exceeds the threshold:
- $250,000 for married filing jointly
- $125,000 for married filing separately
How to Calculate Medicare Wages?
To calculate Medicare wages, start with total gross pay and subtract any pre-tax deductions that are excluded under a Section 125 plan (like employee-paid health insurance premiums). 401(k) and 403(b) contributions do not reduce Medicare wages.
Example (2025):
An employee earns $90,000 annually, contributes $3,000 to a pre-tax health plan, and $5,000 to a 401(k).
- Medicare wages = $90,000 – $3,000 (health premium) = $87,000
- 401(k) does not reduce this amount
Employers then multiply $87,000 × 1.45% = $1,261.50 (employee Medicare tax withheld).
Because there’s no wage cap, high earners continue to pay Medicare tax on all income, plus the 0.9% surtax once they exceed $200,000.
How to Calculate Medicare Wages and Tips?
For employees who earn tips, both the wages and the reported tips are added together to determine total Medicare taxable wages.
Example:
An employee earns $45,000 in wages and reports $5,000 in tips for the year.
- Medicare wages = $50,000
- Tax = 1.45% × $50,000 = $725 withheld
- Employer also pays 1.45% × $50,000 = $725
If the employee exceeds $200,000 in total wages and tips, the 0.9% Additional Medicare Tax applies on the excess.
Employers must ensure accurate tip reporting to avoid under-withholding and penalties.
How Do Tips Affect Medicare Taxes?
Tips are treated as regular income for FICA and Medicare purposes, provided they meet reporting thresholds.
Employees must report cash tips of $20 or more per month per employer, which are then included in Medicare wages and tips on the W-2. Employers are responsible for withholding both the employee and employer portions of the Medicare tax on those tips.
If tips are underreported, both employees and employers may face penalties or tax adjustments during payroll audits.
How to Report Medicare Wages and Tips
Employers report Medicare wages and tips on the annual Form W-2:
- Box 5: Total Medicare wages and tips
- Box 6: Total Medicare tax withheld
It’s common for Box 3 (Social Security wages) and Box 5 (Medicare wages) to differ. The difference arises because Social Security wages are capped ($176,100 in 2025), while Medicare wages are uncapped and may be reduced by cafeteria-plan deductions.
Payroll teams should confirm that their systems correctly track these distinctions and that tip reporting workflows align with IRS guidance.
Do Employers Pay Medicare Tax on Tips?
Yes. Employers must pay their 1.45% Medicare match on all employee wages and reported tips. This applies even if the employee’s reported tips are the only earnings received that period.
Self-employed individuals pay both portions (a combined 2.9%) through Self-Employment (SE) tax. For high earners, the 0.9% Additional Medicare Tax applies only to the employee portion—not the employer’s.
Compliance and Payroll Best Practices
To stay compliant with 2025 Medicare wage reporting and tax requirements, employers should:
- Verify that payroll systems reflect the 2025 Social Security wage base ($176,100) and the uncapped Medicare rate (1.45%).
- Audit Section 125 cafeteria plan elections to ensure proper FICA/Medicare handling (2025 health FSA limit: $3,300).
- Confirm that W-2 Boxes 3, 5, and 6 are correctly mapped for all employees.
- Communicate with high earners about the 0.9% surtax and Form 8959 reconciliation requirements.
Proper reporting of Medicare wages and tips helps employers avoid costly penalties, ensures accurate withholding, and supports long-term compliance with federal payroll tax laws.
Understanding Medicare Wages in Context
Because Medicare wages have no cap, they play a critical role in payroll tax funding and benefit financing. For employers, correctly classifying Medicare taxable wages impacts FICA costs, employee take-home pay, and benefits strategy.
By maintaining accurate reporting and leveraging Section 125 plans to reduce taxable payroll, businesses can stay compliant while managing costs effectively.
Whether you’re an HR manager, payroll processor, or small-business owner, understanding Medicare wages and tips ensures your reporting stays accurate—and your organization remains audit-ready.
Medicare Wages and Tips FAQ
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 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.
Danielle Green
