An employer is legally required to withhold Medicare tax from employee wages. The employee is exempt from withholding only if an exception applies, such as if she works for a university at which she is also a student. Unlike federal income tax, which depends on varying factors such as the employee’s filing status and allowances, Medicare tax is based on a flat percentage of wages. Furthermore, unlike Social Security tax, which has an annual wage limit, Medicare has none. To determine the amount of Medicare tax an employee should pay, you must first figure the wages.
Determine whether the employee has voluntary pretax deductions. These are deductions the employer offers and the employee accepts. Pretax deductions are those that meet the requirements of IRS Section 125 code, such as a traditional 401k plan, a Section 125 medical or dental plan or a flexible spending account.
Subtract applicable pretax deductions from the employee’s gross pay – earnings before deductions – to arrive at Medicare wages. This process gives the employee a tax break since it reduces the amount of wages subject to Medicare tax. If the employee has no pretax deductions, her entire gross pay is also her Medicare wages.
Calculate Medicare tax at 1.45 percent of the employee’s Medicare wages to arrive at the amount of tax to withhold. Notably, the employer pays an equal portion of Medicare tax.
Report the employee’s Medicare wages for the year in box 5 of her W-2 form.
- Report the employee's Medicare wages for the year in box 5 of her W-2 form.
Grace Ferguson has been writing professionally since 2009. With 10 years of experience in employee benefits and payroll administration, Ferguson has written extensively on topics relating to employment and finance. A research writer as well, she has been published in The Sage Encyclopedia and Mission Bell Media.