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An HR Glossary for HR Terms

Glossary of Human Resources Management and Employee Benefit Terms

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Medicare Wages and Tips (W-2)

What Are Medicare Wages and Tips on a W-2?

The Medicare wages and tips section on a W-2 form states the amount of your earnings that are subject to Medicare tax withholding. The number included in this box will usually be identical to the “wages, tips, other compensation” section on the W-2 form. These matching numbers show that the Medicare tax is based on 100% of an employee’s earnings.

Which Wages Are Subject to Medicare Tax?

Almost all wages earned by an employee in the United States are subject to the Medicare tax. How much an individual is taxed will depend on their yearly earnings. 

However, certain pretax deductions are exempt from the FICA tax, which includes Social Security and Medicare taxes. These pretax deductions include retirement contributions, like 401(k) accounts and individual retirement accounts, as well as life insurance premiums.

What Is the Medicare Tax Rate?

The 2020 rate for the Medicare tax is 1.45% for employers and 1.45% for employees. However, this rate varies depending on your annual income.

You can expect to be taxed at the 1.45% rate if you fall under the following categories:

  • For Single Taxpayers: The first $200,000 of your wages

  • For Married Taxpayers Filing Jointly: The first $250,000 of your wages

  • For Married Taxpayers Filing Separately: The first $125,00 of your wages

If your earnings exceed those amounts in your category, an additional 0.9% (known as the Additional Medicare Tax) will be added to your Medicare tax for everything you earn above the threshold, totaling a 2.35% tax rate.

If you are self-employed, the 2020 Medicare tax rate is 2.9% on the first $137,700 of your yearly earnings. Don’t forget to check the rates and income thresholds for your current tax year, as necessary.

What Are Medicare Taxes Used For?

Medicare taxes go toward the Medicare program—a federal health insurance program for Americans who are older than 65 or have certain disabilities and diseases. The funds taken from Medicare taxes cover three areas.

Part A: Hospital Insurance

Part A covers hospital stays, hospice care, care in nursing facilities, and some aspects of at-home health care.

Part B: Medical Insurance

Part B pays for some doctors’ services, outpatient care, and preventive services, and covers the cost of medical supplies.

Part D: Prescription Drug Coverage

Part D is meant to cover the cost of prescription drugs, which includes doctor-recommended shots and vaccines. 

Funding the Affordable Care Act

Money gathered from the Additional Medicare tax is put toward the Affordable Care Act, also known as Obamacare. 

The law is intended to provide health insurance coverage to uninsured Americans. It also helps lower-income families qualify for more savings on health insurance plans through cost-sharing reductions and premium tax credits.

Who Must Pay Medicare Taxes?

Nearly everyone who works in the United States is subject to the Medicare tax, regardless of their citizenship or residency status. Non-resident aliens with H-2, H-2A, J-, and Q-visas may be exempt from Medicare taxes if they meet all the IRS exemption requirements.

What Are Employers Responsible for Regarding Medicare Taxes?

Employers are responsible for withholding and reporting Medicare taxes taken from an employee’s wages. They must also deposit these wages into an authorized bank or financial institution. 

An employer is also required to match 1.45% of an employee’s withholding for Medicare wages and tips. For example, if an employee makes $2,000 during their pay period, that employee would have $29 withheld from their paycheck, and their employer would match that contribution with an additional $29 paid toward Medicare.

The 0.9% Additional Medicare Tax is applied to employees only, so employers are not obligated to match that tax contribution.

Employers found to be non-compliant with these standards may face criminal or civil sanctions.

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