Understanding Medicare wages and tips
Medicare wages and tips refer to an employee’s total earnings subject to Medicare tax, including regular salaries, tips, and certain taxable benefits. This tax helps fund Medicare, the federal health insurance program for individuals aged 65 and older and some younger individuals with disabilities.
As an employer, it’s crucial to understand what income qualifies as Medicare wages and tips to ensure accurate payroll tax calculations and compliance with IRS regulations.
What’s included in Medicare wages?
Medicare wages include most forms of employee compensation, such as:
- Regular wages and salaries – Payments for work performed, whether hourly or salaried.
- Bonuses and commissions – Extra earnings beyond base wages.
- Overtime pay – Additional pay for hours worked beyond the standard schedule.
- Tips reported by employees – Employees must report tips over $20 per month for Medicare tax purposes.
- Taxable fringe benefits – Includes employer-provided perks like personal use of a company car or taxable relocation expenses.
- Paid time off (PTO) – Covers vacation, sick leave, and holiday pay.
What earnings are not subject to Medicare tax?
While most employee compensation is subject to Medicare tax, some earnings are excluded, such as:
- Reimbursements for business expenses under an accountable plan.
- Contributions to qualified retirement plans like 401(k)s (though these are still subject to Social Security tax).
- Employer-provided health insurance premiums (in most cases).
Understanding which payments are subject to Medicare tax can help prevent errors in payroll processing.
How Medicare tax is calculated
Medicare tax is calculated as follows:
- 1.45% of an employee’s Medicare wages are withheld from their paycheck.
- Employers must also contribute 1.45%, making the total Medicare tax 2.9%.
- Employees earning over $200,000 per year (or $250,000 for married couples filing jointly) are subject to an Additional Medicare Tax of 0.9%—but employers do not match this additional amount.
How tips impact Medicare wages
Tips are part of an employee’s taxable income and must be reported for tax purposes. Employers are responsible for:
- Ensuring employees report tips over $20 per month.
- Withholding Medicare and Social Security taxes from reported tips.
- Paying the employer’s share of Medicare tax on reported tips.
Employers in tipped industries (such as restaurants and hospitality) must monitor tip reporting closely to comply with IRS rules.
Reporting Medicare wages and tips on payroll forms
Employers report Medicare wages and tips on:
- Form W-2 (Box 5) – Shows each employee's total Medicare wages and tips
- Form 941 – Employer’s Quarterly Federal Tax Return includes Medicare tax details
- Form 944 – For small businesses that file annually instead of quarterly
Keeping accurate records ensures payroll tax compliance and avoids IRS penalties.
Payroll tax compliance is easier with Homebase
Handling Medicare tax calculations and payroll reporting can be time-consuming, but Homebase payroll simplifies the process by:
- Automatically calculating Medicare wages and tax withholdings
- Tracking and reporting taxable earnings, including tips
- Filing payroll tax forms like Form 941 and W-2s on time
- Ensuring compliance with federal and state payroll tax laws
Homebase payroll simplifies tax calculations today so you can focus on growing your business.