How to Calculate Medicare Wages and Related Taxes
Understand how your income is assessed for Medicare tax purposes. This guide clarifies calculations for employees and self-employed individuals.
Medicare tax is a fundamental component of the Federal Insurance Contributions Act (FICA) tax system. This federal health insurance initiative provides coverage primarily for individuals aged 65 or older, along with certain younger people who have disabilities. Understanding how Medicare wages are determined and how the associated taxes are calculated is essential for both employed and self-employed individuals.
Understanding Medicare Wages
“Medicare wages” represent an employee’s total earnings subject to the Medicare tax. Unlike Social Security wages, which have an annual wage base limit, all earned income is generally subject to Medicare tax without a cap. For 2025, the standard Medicare tax rate is 1.45% for employees, with employers contributing a matching 1.45%, for a total of 2.9%.
These wages are distinct from an individual’s gross pay, as certain pre-tax deductions can reduce the amount considered Medicare wages. The concept of Medicare wages ensures that contributions to the Medicare trust funds are based on a broad measure of an individual’s compensation. This foundational understanding is necessary to accurately assess one’s tax obligations.
Income Subject to Medicare Tax
Various forms of compensation are typically included when calculating Medicare wages. This encompasses regular wages, salaries, and hourly pay. Bonuses and commissions are also fully subject to Medicare tax.
Additional types of income, such as tips reported by employees (for amounts over $20 per month), overtime pay, and severance payments, are considered Medicare wages. Certain non-cash fringe benefits provided by an employer, like the taxable value of group-term life insurance coverage exceeding $50,000, are included in this taxable wage base.
Income Not Subject to Medicare Tax
While most compensation is subject to Medicare tax, certain types of income or deductions are specifically excluded from Medicare wages. Pre-tax deductions for qualified retirement plans, such as 401(k) or 403(b) contributions, generally reduce the amount of wages subject to Medicare tax. Similarly, pre-tax deductions for health insurance premiums typically lower Medicare wages. Other qualified benefits, including contributions to health savings accounts (HSAs), dependent care assistance programs, and adoption assistance benefits, are also commonly excluded. These exclusions are designed to encourage participation in beneficial programs by providing tax advantages.
Calculating Medicare Tax for Employees
Calculating Medicare tax for employees begins with determining the gross wages paid for a given pay period. From this gross amount, any pre-tax deductions exempt from Medicare tax are subtracted. The resulting figure represents the Medicare taxable wages.
The employee’s portion of Medicare tax is calculated by multiplying these Medicare taxable wages by the employee rate. Employers withhold this amount from each paycheck and remit it, along with their matching contribution, to the Internal Revenue Service (IRS). Form W-2 reports this information, with Box 5 showing Medicare wages and tips, and Box 6 indicating Medicare tax withheld.
Calculating Medicare Tax for Self-Employed Individuals
Self-employed individuals pay Medicare tax as part of their Self-Employment Tax (SE tax), which covers both Social Security and Medicare. Unlike employees, self-employed individuals are responsible for both the employer and employee portions of the Medicare tax, totaling 2.9% on their net earnings from self-employment.
To determine net earnings from self-employment, individuals subtract ordinary and necessary business expenses from their gross income. The amount subject to SE tax is 92.35% of these net earnings. Self-employment tax is computed on Schedule SE (Form 1040), and half of the total SE tax paid is deductible as an adjustment to income on Form 1040.
The Additional Medicare Tax
The Additional Medicare Tax applies to high-income earners and is an extra 0.9% tax on Medicare wages, Railroad Retirement Tax Act (RRTA) compensation, or net earnings from self-employment that exceed certain thresholds. For single filers, heads of household, and qualifying widow(er)s, this tax applies to income over $200,000. For married individuals filing jointly, the threshold is $250,000, and for those married filing separately, it is $125,000.
This additional tax is imposed on income exceeding these thresholds. Employers must begin withholding the 0.9% Additional Medicare Tax once an employee’s wages surpass $200,000 in a calendar year, regardless of filing status. Self-employed individuals calculate this tax on Schedule SE, and the total Additional Medicare Tax is reported on Form 8959, attached to Form 1040.