What Counts as Medicare Wages: Bonuses, 401(k)s, and RSUs

Almost everything an employer pays you counts as Medicare wages: base salary, hourly pay, overtime, bonuses, commissions, severance, cashed-out vacation, taxable fringe benefits, tips, and the money you defer into a traditional 401(k). Federal law defines wages for Medicare purposes as all pay for employment, in cash or in kind, and unlike Social Security tax, there is no annual income cap.¹ Every qualifying dollar is hit with the 1.45% Medicare tax, no matter how high your earnings go for the year.

The Rate and Why There’s No Ceiling

Medicare tax is split evenly: you pay 1.45% and your employer pays 1.45%, for a combined 2.9%.¹ Social Security tax stops once your wages hit the annual wage base, which is $184,500 in 2026.² Medicare has no such stopping point. Earn $500,000, and every dollar of it gets the 1.45% treatment. High earners also pay an extra 0.9% Additional Medicare Tax once wages cross certain thresholds, addressed below.

Bonuses, Commissions, Overtime, and Final Paychecks

Base pay and hourly wages are the obvious cases. Overtime and shift differentials are treated identically, taxed at the full 1.45%.¹

Bonuses and commissions count in full. A $10,000 performance bonus produces $145 in Medicare withholding on that payment. The type of bonus doesn’t matter: a holiday gift, a sales incentive, a signing bonus, or a retention award. The whole amount is subject to Medicare tax when paid. Commissions get added to your year-to-date earnings, and if a large check pushes you past $200,000 for the year, your employer must begin withholding the 0.9% Additional Medicare Tax in that same pay period, even if the payment falls outside your normal cycle.³

Severance pay is Medicare wages. The Supreme Court settled this in United States v. Quality Stores, ruling that severance payments are remuneration for employment and therefore wages for FICA.⁴ Lump sum or installments, the answer is the same. Accumulated PTO or vacation cashed out at termination is treated the same way. Your final paycheck still shows the 1.45% withholding, and every dollar still counts toward the Additional Medicare Tax threshold.

401(k) Deferrals vs. Cafeteria Plan Benefits

This is where the answer surprises people. Contributions to a traditional 401(k) or 403(b) plan reduce your federal income tax for the year, but they do not reduce your Medicare wages. The IRS requires Medicare tax to be calculated on gross earnings before any retirement plan deduction.⁵ The statute pulls those deferrals back in specifically for FICA purposes.⁶ If you earn $6,000 a month and defer $1,000 into your 401(k), Medicare tax is calculated on the full $6,000. The same rule reaches 403(b) plans, 457(b) governmental plans, and designated Roth contributions inside those plans. Your employer’s matching contributions, on the other hand, stay out of your Medicare wages. Only your own elective deferrals stay in.

Section 125 cafeteria plan deductions work differently. These actually do reduce your Medicare wages.⁷ The main items:

Your share of employer-sponsored health insurance premiums deducted before tax.
Healthcare and dependent care FSAs funded through salary reduction.
HSA contributions made through payroll, including employer contributions, which are generally exempt from Medicare tax.⁸

The practical takeaway: a 401(k) deferral saves you income tax but not Medicare tax. A cafeteria plan deduction saves you both. Funding an HSA through payroll rather than contributing on your own and deducting later picks up an additional Medicare tax savings you’d otherwise miss.

Fringe Benefits

When your employer gives you something of value beyond cash, the IRS generally treats its fair market value as Medicare wages.⁹ The common cases:

Company Vehicles

Personal use of an employer-provided vehicle is Medicare wages. Employers value it using an IRS method (cents-per-mile, commuting valuation, or annual lease value), and the result shows up on your pay stub as imputed income taxed at 1.45%.¹⁰

Group-Term Life Insurance

Employer-paid group-term life insurance is exempt up to $50,000 of coverage. The value of coverage above that is Medicare wages, priced from the IRS Premium Table by age bracket, so the taxable amount rises with age even when the coverage stays flat.¹¹

Moving Expense Reimbursements

Employer-paid relocation is fully subject to Medicare tax. The exclusion for qualified moving expense reimbursements was permanently eliminated for civilian employees under P.L. 119-21.¹⁰ A $15,000 move adds $15,000 to your taxable compensation. Active-duty members of the Armed Forces moving on a permanent change of station order are the only exception.

Benefits That Stay Out

Some benefits are specifically excluded. De minimis items like occasional snacks, small holiday gifts, or personal use of a copy machine don’t count. Qualified transportation benefits up to $340 per month for transit passes or qualified parking are exempt, as is employer-provided educational assistance up to $5,250 a year.¹⁰ Adoption assistance is a mixed case: exempt from income tax withholding but still subject to Medicare tax.

Tips

Cash tips are Medicare wages, with a reporting quirk. If you receive $20 or more in tips in a calendar month from a single employer, you must report the full amount to that employer, who then withholds Medicare tax on it alongside your regular pay.¹² Tips under $20 in a month don’t have to be reported to the employer, but you still owe the tax when you file.

Allocated tips are different. These are amounts an employer assigns to you when reported tips fall below a required percentage of sales. Because you never reported them as received, your employer cannot withhold Medicare tax on them.¹³ You still owe the tax on those amounts when you file your return.

Stock Options and RSUs

Equity compensation follows different rules depending on the instrument.

Restricted Stock Units

RSUs become Medicare wages when they vest, not when granted. Under the special timing rule for nonqualified deferred compensation, the value is taxed at the later of when the underlying services are performed or when the award is no longer subject to a substantial risk of forfeiture.¹⁴ In practice that’s usually vesting day. Your employer withholds Medicare tax on the fair market value at vesting, and the amount appears in Box 5 of your W-2.

Nonqualified Stock Options

When you exercise a nonqualified option, the spread between your exercise price and the market price is Medicare wages.¹⁵ A $10 strike price and a $50 market price produce $40 of taxable spread per share. A large exercise can push you across the $200,000 Additional Medicare Tax threshold in a single transaction.

Incentive Stock Options

ISOs are the notable exception. No Medicare tax applies when you exercise, and none applies on a qualifying disposition. Even in a disqualifying disposition, where the resulting income shows on your W-2 as ordinary compensation, the IRS does not treat it as subject to FICA. That makes ISOs meaningfully more payroll-tax-efficient than nonqualified options, with the separate tradeoff that they can trigger alternative minimum tax.

The Additional 0.9% for High Earners

Above the standard 1.45%, an extra 0.9% Additional Medicare Tax applies to wages over these thresholds:³

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

The thresholds are not indexed for inflation and haven’t changed since 2013. Wage growth alone pulls more workers across them each year.

A nuance worth knowing: your employer withholds the additional 0.9% once your own wages pass $200,000, regardless of your filing status.³ Married filing jointly with $210,000 of your own wages means your employer will withhold on the last $10,000 even though your $250,000 household threshold isn’t crossed. You reconcile on Form 8959 and claim credit for any overwithholding. The reverse also happens: two spouses each earning $180,000 will have no additional withholding, yet the household owes 0.9% on the $110,000 above $250,000. Estimated payments avoid a surprise at filing.

Self-employment income follows a related but separate calculation, and if you have both W-2 wages and self-employment income, your wages reduce the threshold available to your SE earnings.¹⁶

Why Box 1 and Box 5 Don’t Match

Medicare wages appear in Box 5 of your W-2. That number frequently differs from Box 1, which shows federal taxable wages. The gap has two main sources. 401(k) and other retirement deferrals lower Box 1 but not Box 5, so Box 5 is usually the larger number. Cafeteria plan deductions (health premiums, FSAs, payroll HSAs) lower both boxes. If you know what you deferred and what you paid through a cafeteria plan, the two figures should reconcile against your gross pay for the year.

1
Internal Revenue Service. Topic No. 751, Social Security and Medicare Withholding Rates
2
Social Security Administration. Contribution and Benefit Base
3
Internal Revenue Service. Questions and Answers for the Additional Medicare Tax
4
Justia Law. United States v. Quality Stores Inc., 572 U.S. 141 (2014)
5
Internal Revenue Service. Retirement Plan FAQs Regarding Contributions
6
Office of the Law Revision Counsel. 26 USC 3121 – Definitions
7
Internal Revenue Service. FAQs for Government Entities Regarding Cafeteria Plans
8
Internal Revenue Service. Publication 969, Health Savings Accounts and Other Tax-Favored Health Plans
9
eCFR. 26 CFR 31.3121(a)-1 – Wages
10
Internal Revenue Service. Publication 15-B, Employer’s Tax Guide to Fringe Benefits
11
Internal Revenue Service. Group-Term Life Insurance
12
Internal Revenue Service. Tip Recordkeeping and Reporting
13
Internal Revenue Service. Topic No. 761, Tips – Withholding and Reporting
14
eCFR. 26 CFR 31.3121(v)(2)-1 – Treatment of Amounts Deferred Under Certain Nonqualified Deferred Compensation Plans
15
Internal Revenue Service. Revenue Ruling 2004-60
16
Internal Revenue Service. Topic No. 560, Additional Medicare Tax