Medicare wages and tips are the earnings subject to Medicare tax, shown in box 5 of Form W-2. Medicare tax has no wage cap, so for high earners box 5 is often larger than the Social Security wages in box 3, and it is often larger than box 1 too.
In shortMedicare wages and tips are the part of an employee’s pay that is subject to Medicare tax, and they are reported in box 5 of Form W-2. The IRS says the Medicare tax rate is 1.45% for the employee and 1.45% for the employer, and that there is no wage base limit for Medicare tax. That is the main difference from Social Security tax, which stops once wages reach the yearly wage base, $184,500 for 2026. On top of the regular rate, employers must withhold the 0.9% Additional Medicare Tax on an individual’s wages paid over $200,000 in a calendar year, and there is no employer match for it. The employer starts withholding it in the pay period when wages pass $200,000, whatever the employee’s filing status. Box 5 often differs from box 1, taxable wages for income tax, because some deductions reduce income tax wages but not Medicare wages. A common example is an employee’s pre-tax 401(k) deferral, which lowers box 1 but stays in box 5. Other pre-tax deductions, such as most cafeteria plan health premiums, reduce both. Tips reported to the employer are included too.
Box 1, box 3 and box 5
Three wage boxes on Form W-2
Box
Tax
Limit
Box 1, wages, tips, other compensation
Federal income tax
No limit, reduced by some pre-tax deductions
Box 3, Social Security wages
6.2% each side
Stops at the yearly wage base, $184,500 for 2026
Box 5, Medicare wages and tips
1.45% each side, plus 0.9% employee only over $200,000
Social Security wages stop at the wage base. Medicare wages do not, and 0.9% more applies above $200,000.
Worked example: two employees, two reasons box 5 is bigger
A 401(k) saver and a high earner
A technician earns $60,000 and defers $5,000 to the 401(k). Her box 1 is $55,000, because the deferral is not subject to income tax. Her box 3 and box 5 are both $60,000, because the deferral is still subject to Social Security and Medicare tax.
A sales director earns $230,000. His box 3 stops at the 2026 wage base of $184,500, so Social Security tax is 6.2% of $184,500 = $11,439. His box 5 is the full $230,000. Regular Medicare tax is 1.45% x $230,000 = $3,335 from him, and the company pays a matching $3,335.
Once his wages pass $200,000, payroll also withholds the 0.9% Additional Medicare Tax on the remaining $30,000, which is $270, with no employer match. In the paycheck where he crosses $200,000, the extra withholding applies only to the part above the threshold.
Mistakes that are specific to Medicare wages
Stopping Medicare tax at the Social Security wage base.
Matching the 0.9% Additional Medicare Tax on the employer side.
Taking 401(k) deferrals out of box 5 as well as box 1.
Forgetting reported tips in Medicare wages.
Not starting Additional Medicare withholding in the pay period when wages pass $200,000.
Checking box 5 before W-2s go out
Box 5 should never be lower than box 3 for the same employee, because Social Security wages stop at the wage base and Medicare wages do not.
For most employees under the wage base, box 3 and box 5 are the same.
Box 5 includes reported tips, so tipped employees often have a box 5 well above their cash wages.
Check that the 0.9% Additional Medicare Tax was withheld for anyone over $200,000, starting in the right pay period.
Compare the year’s Medicare wages with the four quarterly Forms 941.
Most box 5 errors come from a deduction set up with the wrong tax treatment in payroll, such as a 401(k) deferral marked as exempt from Medicare. One wrong setting repeats on every check for the year, so check new deduction codes when they are created, not in January.
Second example: a server’s tips
A restaurant server earns $25,000 in cash wages during the year and reports $8,000 in tips to the employer.
Her box 5 Medicare wages and tips are $33,000. Medicare tax on that is 1.45%, or $478.50 from her and a matching $478.50 from the employer. Because tips are reported to the employer, payroll withholds Medicare on them from her wages, and the reported tips appear in box 7 as Social Security tips as well.
Explain box 5 before anyone asksAdd one line to the January W-2 note: box 5 can be larger than box 1 because retirement deferrals are still subject to Medicare tax. It answers the most common W-2 question before it reaches HR.
Questions people ask
What are Medicare wages and tips on a W-2?
Box 5 of Form W-2, the wages and tips subject to Medicare tax.
Why are my Medicare wages higher than my wages in box 1?
Some pre-tax deductions, such as 401(k) deferrals, reduce income tax wages in box 1 but not Medicare wages in box 5.
Is there a limit on Medicare wages?
No. Medicare tax applies to all covered wages. Social Security tax stops at the yearly wage base.
Who pays the Additional Medicare Tax?
The employee. The employer withholds 0.9% on wages over $200,000 in a calendar year and does not match it.
Are reported tips included in Medicare wages?
Yes. Tips an employee reports to the employer are included in Medicare wages and tips in box 5.
Do pre-tax health premiums reduce Medicare wages?
Usually yes. Health premiums paid pre-tax through a cafeteria plan generally reduce Medicare wages as well as income tax wages, unlike 401(k) deferrals.
Disclaimer: What you read here about medicare wages and tips is general information, not legal, payroll or tax advice, so confirm the current rule where you operate; the examples are fictional.
