Medicare Wages and Tips: What It Means for Employers

What it means in practice

Medicare wages and tips is the wage figure that measures how much of an employee's pay is subject to the hospital insurance part of FICA. The tax itself is set by 26 U.S.C. 3101(b), which imposes 1.45 percent on "wages (as defined in section 3121(a))," and the employer pays a matching amount. This entry covers the wage amount: what goes into box 5 of Form W-2, what stays out, and why box 5 often differs from the other wage boxes. Rates, coverage and day-to-day Additional Medicare Tax withholding are on the FICA entry; filing deadlines and penalties are on the W-2 entry.

The starting rule. The 2026 General Instructions for Forms W-2 and W-3 say the wages and tips subject to Medicare tax are the same as those subject to Social Security tax (boxes 3 and 7), except that there is no wage base limit for Medicare tax. In practice, an employer builds box 5 from the same list of items it uses for Social Security wages, adds reported tips, and never stops counting at the wage base. Under section 3121(a), "wages" means all remuneration for employment, including noncash remuneration, unless a specific exclusion applies.

What goes into box 5. Regular salary and hourly pay, overtime, bonuses (including signing bonuses), commissions, vacation pay and severance are Medicare wages; Publication 15 states that severance payments are wages subject to Social Security and Medicare taxes. The W-2 instructions also place these items in box 5: elective deferrals to 401(k), 403(b) and similar plans (even though they are left out of box 1); designated Roth contributions; employee salary reduction contributions to a SEP or SIMPLE IRA; the taxable cost of group-term life insurance over $50,000; employee HSA contributions not made through a cafeteria plan; adoption benefits, which are excluded from box 1 but not from box 5; taxable fringe benefits, including personal use of a company vehicle; nonqualified moving expense reimbursements; golden parachute payments; and military differential pay for active duty of 30 days or less. Noncash benefits of this kind are often called imputed income.

What stays out of box 5. Publication 15 says employer payments for accident or health insurance for employees and their families are not wages for Medicare tax, and that employer HSA or Archer MSA contributions are not subject to Medicare tax if they are reasonably expected to be excludable from income. Under 26 U.S.C. 3121(a)(5)(G), payments under a section 125 cafeteria plan are not wages if they would not be wages without the plan, which is why many pre-tax deductions for health coverage reduce box 5 as well as box 1. Publication 15-B Table 2-1 lists other benefits that are exempt from Social Security and Medicare up to stated 2026 limits, such as dependent care assistance up to $7,500 ($3,750 for a married employee filing separately), educational assistance up to $5,250, and transit passes or qualified parking up to $340 a month each. Amounts above those limits go into boxes 1, 3 and 5. Allocated tips, accountable plan reimbursements and military differential pay for active duty scheduled to exceed 30 days are also left out of box 5.

Why box 5 can be larger than box 1. Box 1 is income tax wages, and several items are excluded from it but not from Medicare wages. The largest is usually 401(k) and 403(b) elective deferrals; adoption assistance and SEP or SIMPLE salary reductions work the same way. The opposite also happens: a 2% shareholder-employee of an S corporation has health premiums included in box 1, but Publication 15-B says the employer can generally exclude them from Social Security, Medicare and FUTA wages. A box 1 and box 5 mismatch is not by itself an error.

Why box 5 can be larger than box 3. Box 3 stops at the Social Security wage base ($184,500 for 2026) and box 5 has no cap; the W-2 entry walks through the IRS example.

Tips in box 5. Under 26 U.S.C. 3121(q), tips an employee receives are treated as remuneration and are deemed paid when the employee furnishes the written tip report to the employer. Section 3121(a)(12) excludes tips paid in any medium other than cash and cash tips totaling less than $20 in a calendar month with one employer. The IRS tip page says reported tips must be included in box 1, box 5 and box 7, and the W-2 instructions say to include tips the employee reported even if there were not enough employee funds to collect the Medicare tax. Uncollected employee Medicare tax on tips is shown in box 12 with code B and is not included in box 6; uncollected Additional Medicare Tax is not reported with code B. Allocated tips from Form 8027 go only in box 8 and are not included in boxes 1, 3, 5 or 7. Mandatory service charges are not tips: the IRS says service charges distributed to employees are wages, so they enter box 5 as ordinary pay rather than through the tip boxes. On 2026 forms, reported cash tips also appear in box 12 with code TP.

Additional Medicare Tax runs on the same wages. Publication 15 states that all wages subject to Medicare tax are subject to Additional Medicare Tax withholding if paid in excess of the $200,000 withholding threshold. The threshold is tested against Medicare wages, not box 1 wages, so a pre-tax 401(k) deferral that lowers box 1 does not lower the amount counted toward $200,000. The IRS Additional Medicare Tax Q&A adds that tips and noncash fringe benefits count, and that third-party sick pay is combined with the employer's wages for the threshold. When the employee files, the IRS says Medicare wages and tips from all Forms W-2, combined with a spouse's on a joint return, are compared with the filing-status threshold on Form 8959. RRTA compensation for railroad workers is compared with the threshold separately.

Workers whose box 5 is empty or different. Some employees have box 1 wages but nothing in box 5. The W-2 instructions say boxes 3 and 5 should be left blank for clergy and religious workers who are not subject to Social Security and Medicare taxes as employees, and no amount should be reported in box 3 or 5 for H-2A visa agricultural workers. Publication 15 also lists children under 18 working for a parent's sole proprietorship or parental partnership, and members of a recognized religious sect where both employer and employee belong to it. Government employers are a special case: Publication 15 says state and local government employees hired or rehired after March 31, 1986, who are not covered by a section 218 agreement or mandatory Social Security, are generally subject to Medicare tax only (see also 26 U.S.C. 3121(u)). For these Medicare-only employees, box 5 carries the Medicare wages while box 3 does not. Government employers filing a separate Medicare-only set of Forms W-2 check "Medicare govt. emp." in box b of Form W-3.

Deferred compensation timing. For nonqualified deferred compensation and nongovernmental 457(b) plans, the W-2 instructions say deferred amounts must be included in box 5 as of the later of when the services are performed or when there is no substantial risk of forfeiture, even if nothing is paid out. Later distributions are reported in box 1 (and generally box 11) but are not counted again in box 5. In the IRS reporting chart, an employee with $200 of regular wages who defers a vested $20, with a vested $10 employer match, shows $180 in box 1 and $210 in boxes 3 and 5. The Additional Medicare Tax Q&A says the same special timing rule decides when these amounts count toward the $200,000 withholding threshold.

Two special situations from the IRS instructions. First, when an employee dies and the employer pays accrued wages to the estate in the same year, the payment is reported as Social Security and Medicare wages but not in box 1. In the IRS example, Sam earned $10,000 before death and $3,000 of accrued wages and vacation pay was paid to the estate, so box 1 is $10,000, box 5 is $13,000 and box 6 is $188.50 (1.45% of box 5). Second, a household or agricultural employer that pays the employee's share of Social Security and Medicare taxes adds that amount to box 1 but not to boxes 3 and 5. In the Publication 15 example, a farm employee paid $1,000 shows $1,076.50 in box 1 and $1,000.00 in boxes 3 and 5.

Example 1 (illustration): a 401(k) and pre-tax health premiums. In 2026 an employee earns $70,000, defers $6,000 to a 401(k), pays $2,400 of health premiums through a section 125 cafeteria plan, and has $300 of taxable group-term life insurance cost over $50,000. Box 1 is $61,900 ($70,000 - $6,000 - $2,400 + $300). Box 5 is $67,900 ($70,000 - $2,400 + $300), because the 401(k) deferral stays in Medicare wages and the cafeteria plan premium does not. Box 6 is $984.55 (1.45% of $67,900), and the employer pays the same amount as its share.

Example 2 (illustration): a tipped employee. A server is paid $30,000 in wages, reports $12,000 in cash tips during 2026, and is allocated $1,500 more on Form 8027. Box 3 is $30,000, box 7 is $12,000 and box 8 is $1,500. Box 5 is $42,000 ($30,000 + $12,000); the allocated tips are not included. The Medicare tax due on box 5 is $609.00 (1.45% of $42,000). Any part the employer could not withhold goes in box 12 with code B, and box 6 shows only what was actually withheld.

Example 3 (illustration): a high earner with a 401(k). An employee is paid $240,000 in 2026 and defers $20,000 to a 401(k). Box 1 is $220,000, box 3 is $184,500 and box 5 is $240,000. Regular Medicare tax is $3,480 (1.45% of $240,000). Because Medicare wages, not box 1 wages, are tested against the threshold, the employer withholds Additional Medicare Tax on $40,000, which is $360. Box 6 is $3,840. The employer matches the $3,480 but not the $360. On Form 941 for the year, these wages appear on line 5c ($240,000 x 0.029 = $6,960) and the excess on line 5d ($40,000 x 0.009 = $360).

Reporting, reconciliation and corrections. Each quarter, Form 941 line 5c includes all wages, tips, sick pay and taxable fringe benefits subject to Medicare tax, including reported tips the employer could not withhold on. At year end, the W-2 instructions tell employers to reconcile box 5 of Form W-3 with the year's Forms 941, 943, 944 or Schedule H, to avoid a nonzero box 6 when box 5 is zero, and to avoid a box 5 below boxes 3 and 7. Medicare wage errors are corrected on Form W-2c, but Additional Medicare Tax withheld is changed only for an administrative error, meaning box 6 did not match what was actually withheld. Deposits of withheld and employer Medicare tax follow the federal tax deposit rules.

Where states differ. Box 5 is a federal figure and is the same in every state. State income tax wages in box 16 follow state law and can differ from both box 1 and box 5. As one example, the Pennsylvania Department of Revenue states that employee contributions to a 401(k) or 403(b) plan, and employee payments for dependent care, are not excludable from Pennsylvania taxable compensation. For a Pennsylvania employee, box 16 can therefore be higher than box 1 even though box 5 is unaffected. Check your own state revenue agency for its wage definition.

Questions employers ask. Does box 6 include Additional Medicare Tax? Yes; box 6 shows all employee Medicare tax withheld, including Additional Medicare Tax, and never the employer share. Is there a Medicare wage base? No; the IRS states all covered wages are subject to Medicare tax. This entry describes federal rules only and is not tax advice; confirm specific cases with the IRS or a qualified professional.

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