How to Calculate Medicare Wages: Formula, Exclusions, and W-2 Box 5

To calculate Medicare wages, start with your gross compensation for the year, subtract the narrow set of pre-tax deductions that federal law allows (health, dental, and vision premiums paid through a Section 125 cafeteria plan, plus payroll HSA and FSA contributions), and apply 1.45% to the result. An additional 0.9% applies to wages above $200,000 in a calendar year for most filers, and there is no annual cap on the base 1.45%.¹

The Formula

Medicare wages = gross compensation − cafeteria plan exclusions (health, dental, and vision premiums + payroll HSA contributions + health FSA contributions + dependent care FSA contributions).

Then:

Employee share: 1.45% of Medicare wages.
Employer share: 1.45% of the same wages.
Combined rate: 2.9%.¹

Every dollar of Medicare wages is taxed at 1.45%. Social Security tax stops at $184,500 in 2026; Medicare does not.²

What Counts as Compensation

Federal law defines wages broadly for Medicare purposes. Almost everything you receive for work goes into the base, including the cash value of non-cash benefits.³ Start with your gross salary or hourly pay. Then add:

Overtime, commissions, bonuses, signing bonuses, and performance awards.
Cash tips of $20 or more in a calendar month that you report to your employer.³
Vacation pay and back pay.⁴
Taxable fringe benefits, such as the cash value of personal use of a company vehicle.
The imputed cost of employer-provided group-term life insurance coverage above $50,000.⁵

The rule is inclusion by default. Unless a specific exclusion applies, the payment goes in.

What Comes Out Before the Tax

Only a short list of pre-tax deductions reduces wages for Medicare purposes. This is not the same list that reduces your federal income tax.

Health, dental, and vision insurance premiums paid through a Section 125 cafeteria plan are generally not subject to Medicare tax.⁶
HSA contributions made through payroll under a cafeteria plan are excluded, along with employer HSA contributions. HSA contributions you make on your own outside payroll reduce your income tax but not your Medicare wages. The 2026 HSA limits are $4,400 for self-only coverage and $8,750 for family coverage.⁷⁸
Health FSA contributions through a cafeteria plan are excluded. The 2026 limit is $3,400.
Dependent care FSA payroll contributions through a cafeteria plan are also excluded.

Retirement Contributions Do Not Come Out

This is the exclusion people expect and don’t get. Traditional 401(k) and 403(b) contributions reduce federal income tax but stay in the Medicare wage base.⁹ Roth contributions, which are already after-tax, are treated the same way. That’s why Box 5 on the W-2 is often larger than Box 1.

A Worked Example

Say your gross pay for the year is $75,000. You pay $4,800 in health insurance premiums through a cafeteria plan and route $2,000 into an HSA through payroll.

Medicare wages: $75,000 − $4,800 − $2,000 = $68,200.

Employee Medicare tax: $68,200 × 1.45% = $988.90. Your employer pays the same $988.90.

Finding the Number on Your W-2

Box 5 is labeled “Medicare wages and tips” and shows exactly the figure the formula produces. Box 1 shows federal taxable wages, which is a smaller number for most employees because Box 1 also subtracts traditional 401(k) and 403(b) deferrals. Both boxes subtract the same cafeteria plan items.¹⁰ The gap between the two is usually your pre-tax retirement contributions for the year.

Box 3 (Social Security wages) looks like Box 5 but stops at the 2026 cap of $184,500. If you earned $199,750, Box 3 would show $184,500 while Box 5 shows the full $199,750.¹⁰

The Additional 0.9% for Higher Earners

An extra 0.9% applies to Medicare wages above thresholds set by statute. These thresholds do not adjust for inflation.¹¹

Single or head of household: $200,000.
Married filing jointly: $250,000.
Married filing separately: $125,000.¹²

The 0.9% applies only to the amount over the threshold, not your full income. A single filer with $240,000 in Medicare wages owes 1.45% on the full $240,000 plus 0.9% on the $40,000 above $200,000.¹

Your employer starts withholding the extra 0.9% once your wages pass $200,000 in the calendar year, no matter your filing status. Joint filers under $250,000 combined may have been over-withheld and claim a credit; married-filing-separately filers can owe more than was withheld because of the $125,000 threshold. Either way, you reconcile the Additional Medicare Tax on Form 8959 with your annual return.¹³ Checking your year-to-date withholding mid-year helps if you hold multiple jobs or your spouse also works.

If You’re Self-Employed

Self-employed workers pay both halves of Medicare tax, a combined 2.9%, through self-employment tax.¹⁴ The base is different: start with net earnings from self-employment (business income minus ordinary business expenses), then multiply by 92.35%. Apply 2.9% to that adjusted figure.¹⁵

The 0.9% Additional Medicare Tax uses the same thresholds. If you have both wages and self-employment income, the wages reduce the threshold dollar-for-dollar before the extra tax reaches your self-employment earnings.

You can deduct half of your self-employment tax when calculating adjusted gross income. That lowers your income tax; it does not lower the self-employment tax itself.¹⁶

1
Office of the Law Revision Counsel. 26 USC 3101 – Rate of Tax
2
Social Security Administration. Contribution and Benefit Base
3
Office of the Law Revision Counsel. 26 USC 3121 – Definitions
4
eCFR. 26 CFR 31.3121(a)-1 – Wages
5
Internal Revenue Service. Group-Term Life Insurance
6
Internal Revenue Service. FAQs for Government Entities Regarding Cafeteria Plans
7
Internal Revenue Service. Publication 969 (2025), Health Savings Accounts and Other Tax-Favored Health Plans
8
Internal Revenue Service. Notice 2026-05 – HSA Inflation Adjustments
9
Internal Revenue Service. Retirement Plan FAQs Regarding Contributions – Are Retirement Plan Contributions Subject to Withholding for FICA, Medicare or Federal Income Tax
10
Internal Revenue Service. General Instructions for Forms W-2 and W-3 (2026)
11
Internal Revenue Service. 2025 Instructions for Form 8959
12
Internal Revenue Service. Topic No. 560, Additional Medicare Tax
13
Internal Revenue Service. About Form 8959, Additional Medicare Tax
14
Office of the Law Revision Counsel. 26 USC 1401 – Rate of Tax
15
Internal Revenue Service. Topic No. 554, Self-Employment Tax
16
Internal Revenue Service. Self-Employment Tax (Social Security and Medicare Taxes)