Medicare taxable wage is defined as gross earnings minus non-taxable income. Gross earnings are made up of the following:
- Regular earnings
- Overtime earnings
- Paid time-off earnings
- Payouts of time-off earnings (Sick, holiday, and vacation payouts)
- Non-work time for paid administrative leave, military leave, bereavement, and jury duty
- Bonus pay
- Workers’ compensation
- Short-term disability (Note: there is a difference between short-term disability and FMLA leave)
The non-taxable wages are deductions appearing on the pay stub under ‘Before-Tax Deductions.’ These include medical, vision, and dental insurance premiums, Flexible Spending Account Health Care, and Flexible Spending Account Dependent Care.
Employers are required to withhold Medicare tax on employees’ Medicare wages. This is a flat rate of 1.45%, with employers contributing a matching amount. Medicare tax is reported in Box 5 of the W-2 form. There is no maximum gross wage limit for Medicare tax.
The Medicare Program
The Medicare tax deducted from employee wages goes towards the Medicare program provided to Americans over 65 years of age. A line item in an employee pay stub, Medicare tax is implemented under FICA (Federal Insurance Contributions Act) and calculated on the employee’s Medicare taxable wage.
In 1965, Medicare was enacted into law, with Medicare coverage intending to be an important source of post-retirement health care. Medicare is divided into four parts:
Part A, Hospital Insurance: This helps pay for hospice care, in-patient hospital care, and nursing care.
Part B, Medical Insurance: This helps pay towards out-patient hospital visits, doctor’s fees, and medical services/supplies that Part A doesn’t cover.
Part C, Medicare Advantage: Under Part C, employees can opt to get all medical services from a health care provider. Medicare Advantage plans can help keep the costs of medical services low or offer additional benefits for a small extra monthly fee.
Part D, Voluntary Prescription Drug Coverage: Enrollees must complete paperwork to enroll in an approved plan.
For more information about Medicare, visit the Social Security website.
Not sure how to calculate medicare tax for your employees? Let Patriot Software take care of it for you with our full-service payroll program. We take care of everything so that you can take care of your business. Try 60 days free today!