Every January, employees open their W-2 and spot the same oddity: the number in Box 1 (Wages, Tips, Other Compensation) is lower than the number in Box 5 (Medicare Wages and Tips). That gap isn't an error. It reflects the different tax bases Congress wrote into federal income tax versus FICA and Medicare tax. Pre-tax 401(k) contributions, for example, reduce Box 1 but not Box 5. HSA contributions made through a cafeteria plan reduce both. Understanding the differences between these boxes saves payroll teams hours of W-2C corrections and keeps employee questions from escalating into IRS inquiries.
What Medicare Wages Actually Includes Medicare Wages (Box 5) is the amount subject to the 1.45 percent Medicare tax. It includes standard gross wages (regular, overtime, commissions), taxable bonuses, taxable fringe benefits (personal use of a company car, certain moving expenses), severance pay, sick pay paid directly by the employer, and tips reported by the employee. It also includes pre-tax deferrals into 401(k), 403(b), and 457 plans, which are exempt from federal income tax but still subject to Medicare tax.
Box 5 excludes Section 125 cafeteria plan deductions (like pre-tax health insurance premiums and HSA contributions made through the plan), which are exempt from both income tax and Medicare tax. Adoption assistance up to the annual limit, qualified transportation benefits within IRS limits, and employer-paid group-term life insurance premiums on the first $50,000 of coverage are also excluded.
Why Box 5 Usually Differs From Box 1 The most common reason: retirement plan deferrals. A 401(k) contribution reduces Box 1 by the full deferral amount but doesn't reduce Box 5. For an employee earning $100,000 and deferring $10,000 into a 401(k), Box 1 is roughly $90,000 and Box 5 is $100,000. The $10,000 gap is the 401(k) deferral that's Medicare-taxable but not income-taxable at year-end.
Less common drivers of the gap: employer-paid group-term life over $50,000 (taxable for both boxes, but reported in Box 12 Code C), certain employer stock or restricted stock grants taxed differently for FICA vs. income tax, and certain deferred compensation scenarios under IRC Section 409A.
How Does Box 5 Compare to Box 3 (Social Security Wages)? Box 3 (Social Security Wages) and Box 5 (Medicare Wages) usually match exactly up to the Social Security wage base, which is $184,500 for 2026. Above the wage base, Box 3 caps at $184,500 and Box 5 keeps going because Medicare has no wage cap. For an employee earning $300,000, Box 3 is $184,500 and Box 5 is $300,000 (or close to it, depending on pre-tax benefits).
What Does the Additional Medicare Tax Do to Box 6? Box 6 is the Medicare tax withheld. For wages up to $200,000, it's Box 5 times 1.45 percent. Above $200,000, the employer withholds an extra 0.9 percent (the Additional Medicare Tax), so Box 6 gets larger relative to Box 5 for high earners. The math: for an employee with $250,000 in Medicare wages, Box 6 would be approximately $250,000 × 1.45% plus $50,000 × 0.9%, totaling about $4,075.
Reconciling Medicare Wages at Year-End Five common reconciliation issues surface every W-2 season. First, missed pre-tax deduction setup: a cafeteria plan benefit coded wrong in the HRIS produces incorrect Box 1 and Box 5 values. Second, tips not properly reported: service workers who report cash tips to the employer must have those tips flow into Medicare wages. Third, imputed income for group-term life over $50,000: this is often automated wrong and produces W-2C corrections. Fourth, nonqualified deferred compensation timing: Section 409A rules require FICA tax at vesting even if payment is later. Fifth, stock compensation: ISOs, NSOs, and RSUs each have different FICA treatment and often trip up year-end.
For connected payroll concepts, see FICA , Medicare , W-2 form , and payroll . The IRS publishes Form W-2 instructions and reconciliation guidance at irs.gov/forms-pubs/about-form-w-2 and the Social Security wage base at ssa.gov/oact/cola/cbb.html .
Using Medicare Wages and Tips Data for Clean W-2 Processing Payroll teams that want clean W-2s work backward from the Box 5 calculation through the year. Monthly reconciliation of Medicare-taxable wages against gross wages, with documented adjustments for each pre-tax category. A year-end review pack that shows Box 1 vs. Box 5 gaps and explains each driver. And a W-2C workflow ready to go in January, because corrections will happen, and the question is how fast you catch them. The cleanest payroll shops treat Medicare Wages and Tips as one of four reconciling totals (Box 1, Box 3, Box 5, and federal income tax withheld) rather than a W-2 box filled at the end.
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