What is Medicare Tax?

Every paycheck you run has a line on it for Medicare. Most employees glance past it, but as the employer, you are the one legally responsible for calculating it correctly, matching it, depositing it on time, and reporting it on the right line of the right form.

This article walks through how Medicare tax actually works from the payroll side of the desk, what your obligations are, which workers and wages are exempt, and how the math plays out on a real paycheck. Let's begin.

Key Takeaways from this Article

• Medicare tax is a federal payroll tax that funds Medicare Part A, withheld at 1.45 percent from employee wages and matched at 1.45 percent by the employer, for a combined 2.9 percent.
• There is no wage cap on Medicare tax, so it applies to every dollar of covered wages, unlike Social Security tax, which stops at $184,500 for 2026.
• Once an employee's wages from your company pass $200,000 in a calendar year, you must withhold an extra 0.9 percent Additional Medicare Tax on the excess, and you do not match it.
• A handful of real exemptions exist, including your own child under 18 in an unincorporated family business and certain nonresident student and exchange visitor workers, which matters for Maine's seasonal employers.
• The new federal deductions for tips and overtime pay change income tax, not Medicare tax, so you still withhold Medicare on the full amount.

What is Medicare Tax and How Does it Work?

Medicare tax is a federal payroll tax that funds Medicare Part A, the hospital insurance portion of the program. Employers withhold 1.45 percent of an employee's gross covered wages, match that same 1.45 percent out of company funds, and remit the combined 2.9 percent to the IRS. Unlike Social Security tax, Medicare tax applies to every dollar of covered wages with no annual cap.

Medicare tax and Social Security tax together make up what you see labeled FICA, named for the Federal Insurance Contributions Act.

Here is the 2026 breakdown:

The Social Security wage base rose to $184,500 for 2026, up from $176,100 in 2025, while the Medicare rate of 1.45 percent for each side stayed put and continues to carry no wage limit. That means a salaried employee at your company might stop having Social Security withheld in November, while Medicare keeps coming out of every check through December 31 and starts again in January.

The Additional Medicare Tax is the third piece. Individuals with earned income above $200,000, or $250,000 for married taxpayers filing jointly and $125,000 for married filing separately, owe an extra 0.9 percent hospital insurance tax on wages. That surtax came out of the Affordable Care Act and is paid entirely by the employee. You withhold it, but you do not match it.

If you are self-employed, or you are an owner taking a draw rather than a W-2 wage, the math shifts. Self-employed individuals pay both halves through self employment tax, which is 12.4 percent for Social Security up to the wage base plus 2.9 percent Medicare on all net self employment income, with an offsetting deduction for half of that self employment tax.

Medicare Tax Responsibilities for Employers and Payroll Teams

Your obligations break into four categories: withhold, match, deposit, and report. Here is what each one looks like in practice.

1. Withhold on the right wage base. Medicare wages are not the same as gross pay or federal taxable wages. Pretax premiums that are taken through a Section 125 plan reduce Medicare wages. Traditional 401(k) deferrals do not, which surprises a lot of owners the first time they compare Box 1 and Box 5 on a W-2. Bonuses, taxable fringe benefits, and imputed income on group term life over $50,000 all get Medicare tax too.

2. Match the 1.45 percent, and budget for it. This is a real employer cost, not a pass through. On a $2 million payroll, your side of Medicare alone is $29,000.

3. Start the surtax at the right moment. You begin withholding the extra 0.9 percent in the pay period in which an employee's wages from your company pass $200,000 for the year. Use that same $200,000 for everyone, regardless of filing status. You do not adjust it because someone tells you they file jointly, and you do not consider a spouse's income.

4. Report it on the right lines. On Form 941, regular Medicare wages and tips go on line 5c, and wages subject to Additional Medicare Tax withholding go on line 5d. On the W-2, there is no separate box for the surtax. Total employee Medicare tax withheld goes in Box 6, with Medicare wages in Box 5.

It is important to note that an employer is liable for Additional Medicare Tax that was required to be withheld, whether or not it actually deducted the tax from the employee's wages. If your system was not set up to withhold the extra 0.9% at $200,000 and a bonus pushed someone over in Q3, that is your exposure, not the employee's.

Are There Tax Exemptions for Medicare?

Most exemptions are narrow and only apply in particular situations. Claiming one you do not qualify for creates a correction and a penalty. The four that come up most often:

• Nonresident workers in J-1, F-1, M-1, or Q-1 status, on wages for the services their status allows. This one matters if you staff a seasonal operation on the coast with J-1 summer workers, though J-1 and Q-1 non students lose it after two calendar years. The majority of Maine businesses with J-1s do employee nonresident J-1s so these employees do not pay FICA taxes.
• Your own child under 18, if the business is a sole proprietorship or a partnership in which every partner is the child's parent. Incorporate that same business, and the exemption disappears.
• Students employed by the school they attend, while enrolled and regularly attending classes there.
• Members of recognized religious groups that object to public insurance, who apply using Form 4029.

Age is not an exemption. Turning 65, drawing Social Security, or enrolling in Medicare changes nothing as long as wages are being paid.

If Medicare tax was withheld from an exempt worker by mistake, fix it through payroll. Correct the withholding, refund the employee, and issue a W-2c if the year has closed. If you cannot make them whole, they can claim the refund from the IRS on Form 843 with Form 8316.

How Do You Calculate Medicare Taxes?

The calculation for Medicare tax is simple. The hardest part is finding the right wage base and catching the threshold at the right time.

Here are two employees side by side, one below the surtax threshold and one above it.

Two things to notice. The 0.9 percent applies only to the $50,000 above the $200,000 threshold, not to the whole $250,000. And your employer column stays at a flat 1.45 percent of everything, because there is no match on the surtax.

Conclusion

Medicare tax is one of the most stable numbers in payroll. The 1.45 percent has not moved in decades, and there is no cap to track. What makes it worth understanding is everything around the edges: which wages count, which workers are genuinely exempt, when the 0.9 percent surtax kicks in, and where each figure lands on your 941 and your W-2s. Those are the details that turn into corrections and penalties when a system is set up wrong, and they are the details we spend our days on with Maine employers.

Written: August 2026

Written by: Jon Portanova