What Is Excluded From Medicare Wages and Tips?

Medicare wages and tips exclude several common forms of pay: employer contributions to retirement plans, health, dental, and vision premiums paid through a cafeteria plan, employer HSA contributions and salary-reduction FSA deposits, the first $50,000 of employer-provided group-term life insurance, capped amounts of educational, adoption, and dependent care assistance, workers’ compensation, accountable-plan expense reimbursements, and small fringe benefits like occasional meals. Certain workers, including student employees at their own school and children under 18 working for a parent’s unincorporated business, are exempt from Medicare tax entirely. The standard Medicare tax is 2.9% of covered wages, split evenly between employer and employee at 1.45% each, and unlike Social Security tax there is no wage cap.¹

Payments That Don’t Count as Medicare Wages

The exclusions turn on the nature of the payment, not the employee’s job or income. When a payment qualifies, neither side owes the 1.45% on that dollar.

Employer Retirement Plan Contributions

Matching and nonelective employer contributions to a 401(k), 403(b), or eligible governmental 457(b) plan are not Medicare wages.² The employer’s share never enters the Medicare wage base.

Your own elective deferrals are different, and this is the most common source of confusion. When you send part of your paycheck into a pre-tax 401(k), that money reduces your federal income tax withholding but remains subject to Social Security and Medicare tax.² Roth 401(k) deferrals work the same way for FICA purposes. Your 401(k) contribution lowers your income tax; it does not lower your Medicare tax.

Cafeteria Plan Premiums and Salary Reductions

For most employees, the biggest Medicare wage exclusion runs through a Section 125 cafeteria plan. Health, dental, and vision premiums deducted from your paycheck on a pre-tax basis through the plan are generally not subject to FICA, including the Medicare portion.³ Disability insurance and accidental death and dismemberment coverage purchased through the plan get the same treatment.

HSAs and Health FSAs

Employer contributions to a Health Savings Account are excluded from Medicare wages if it is reasonable to believe the amount will be excludable from the employee’s income.⁴ Employee HSA contributions made through a cafeteria plan qualify the same way.

Employee salary reduction contributions to a health Flexible Spending Arrangement are not subject to employment taxes, including Medicare.⁵ For 2026, the maximum employee contribution to a health FSA is $3,400.

Group-Term Life Insurance Up to $50,000

Employer-provided group-term life coverage up to $50,000 is entirely excluded from Medicare wages. Above $50,000, the imputed cost of the excess coverage is added to the Medicare wage base and taxed.⁶ The imputed cost comes from an IRS premium table keyed to the employee’s age, not from the actual policy price, so the taxable amount changes each year as the employee gets older.

Education, Adoption, and Dependent Care Assistance

Payments under a qualified educational assistance program are excluded from Medicare wages up to $5,250 per calendar year, covering tuition, fees, and books whether or not the coursework relates to the current job. Amounts above $5,250 become Medicare wages. Starting with tax years after 2026, the $5,250 cap is scheduled to adjust for inflation.⁷

Qualified employer adoption assistance is excluded up to $17,670 per eligible child for 2026. Anything above that cap is treated as taxable wages for FICA purposes.

Dependent care assistance through an employer plan is excluded from Medicare wages up to $7,500 for 2026, or $3,750 if married filing separately. That ceiling is a substantial increase from the longstanding $5,000 cap.

Fringe Benefits and Reimbursements

Several routine workplace benefits are also outside Medicare wages:

De minimis fringe benefits, meaning items so small in value that tracking them would be unreasonable, such as occasional meals, coffee, or low-value holiday gifts.
Working condition fringe benefits, meaning anything the employee could have deducted as a business expense if they had paid for it themselves, such as a company vehicle used for business travel or employer-paid professional memberships.
Workers’ compensation payments received under a workers’ compensation act for occupational injury or illness. If you return to work and earn regular pay for light-duty tasks, that salary is taxable wages again.⁸
Accountable plan reimbursements, when the employer reimburses you for legitimate business expenses under an arrangement that requires a business connection, timely substantiation of each expense, and return of any excess. Reimbursements that fail any of the three requirements become taxable wages.⁹

Workers Whose Pay Isn’t Subject to Medicare Tax

The exclusions above look at the type of payment. A separate set of rules looks at who is doing the work.

Student Employees at Their Own School

A student who is enrolled and regularly attending classes at a school, college, or university is exempt from FICA on wages earned from that same institution.¹⁰ The employment must be incidental to the education. When a student’s hours and duties start resembling a career employee’s, the IRS can challenge the exemption.

Nonresident Aliens on Certain Visas

Nonresident alien students in the United States on F-1, J-1, or M-1 visas are generally exempt from Social Security and Medicare tax on wages earned while carrying out the purposes of their visa, including on-campus employment and authorized practical training.¹¹ The exemption does not extend to spouses or dependents on F-2, J-2, or M-2 visas. Foreign students generally must have been in the U.S. for fewer than five calendar years and must remain nonresident aliens for tax purposes.

Nonresident alien teachers, researchers, and other professionals on J-1 or Q-1 visas receive a similar exemption for their first two calendar years in the country, provided the work is connected to the visa’s purpose.¹² Once the individual becomes a resident alien for tax purposes, the FICA exemption ends.

Low-Paid Household Employees

Domestic workers in a private home, such as nannies, housekeepers, and gardeners, are subject to FICA only if cash wages from a single household employer reach the annual threshold. For 2026 that threshold is $3,000. Pay a household worker less than $3,000 in cash during the year, and neither side owes Social Security or Medicare tax on those wages. Once the threshold is crossed, all cash wages for the year become subject to FICA, not just the portion above $3,000.¹³

A Child Under 18 Working for a Parent

Wages a parent pays a child under 18 in a sole proprietorship, or in a partnership where both partners are the child’s parents, are exempt from Social Security and Medicare tax. At 18, the FICA exemption ends and both taxes apply. This exemption is limited to unincorporated businesses: if the business is a corporation or an estate, or the partnership has any partner who is not the child’s parent, normal payroll taxes apply regardless of the child’s age.¹⁴

Certain Clergy and Religious Workers

Members of recognized religious orders who have taken a vow of poverty are automatically exempt from self-employment tax, which includes the Medicare component, on earnings from services performed for their order. Ministers, members of religious orders who have not taken a vow of poverty, and Christian Science practitioners can apply for exemption from self-employment tax by filing Form 4361, but only if they are conscientiously opposed to accepting public insurance benefits, including those under the Social Security Act. Once approved, the exemption is permanent.

How the Exclusions Show Up on Your W-2

The result of all these exclusions lands on Form W-2. Box 5, “Medicare wages and tips,” reports the wage base after statutory exclusions.⁴ Box 6 shows the Medicare tax withheld.

A common assumption is that Box 5 should always be lower than Box 1, “Wages, tips, other compensation.” For most employees with pre-tax 401(k) contributions, the opposite is true. Elective 401(k) deferrals reduce Box 1 because they escape income tax, but they stay in Box 5 because they remain subject to Medicare tax.² Cafeteria plan deductions for health premiums reduce both Box 1 and Box 5. If you contribute to a 401(k) and also have employer health coverage, expect Box 5 to be higher than Box 1.

Some excluded payments are still disclosed through Box 12 codes. Employer HSA contributions appear with Code W, and nontaxable sick pay from a third-party payer appears with Code J.⁴ Those Box 12 entries let the IRS see the exclusions without inflating Box 5. A Code W amount was excluded from your Medicare wages and should not appear in Box 5.

1
Internal Revenue Service. Topic No. 751, Social Security and Medicare Withholding Rates
2
Internal Revenue Service. Retirement Plan FAQs Regarding Contributions
3
Internal Revenue Service. FAQs for Government Entities Regarding Cafeteria Plans
4
Internal Revenue Service. 2026 General Instructions for Forms W-2 and W-3
5
Internal Revenue Service. Publication 969, Health Savings Accounts and Other Tax-Favored Health Plans
6
Internal Revenue Service. Group-Term Life Insurance
7
Office of the Law Revision Counsel. 26 USC 127 – Educational Assistance Programs
8
Internal Revenue Service. Publication 525, Taxable and Nontaxable Income
9
eCFR. 26 CFR 1.62-2 – Reimbursements and Other Expense Allowance Arrangements
10
Office of the Law Revision Counsel. 26 USC 3121 – Definitions
11
Internal Revenue Service. Foreign Student Liability for Social Security and Medicare Taxes
12
Internal Revenue Service. Alien Liability for Social Security and Medicare Taxes of Foreign Teachers, Foreign Researchers, and Other Foreign Professionals
13
Internal Revenue Service. Publication 926 (2026), Household Employer’s Tax Guide
14
Internal Revenue Service. Family Employees