Understanding Medicare Qualified Government Wages for Your Small Business

Medicare Qualified Government Wages is a term that can be confusing to those who do not work in the medical field. Medicare qualified government wages are determined by the Internal Revenue Service and they determine how much money you make before you have to pay taxes on Social Security benefits, as well as retirement plans such as pensions and IRAs.

First of all, you should note that if you work for a state, local or federal government agency and earn more than $110,100 annually from your employment then Social Security taxes do not apply to the first dollar of earnings over this limit. The question is how does the IRS determine what it means by “government wages”?

The answer lies in an important tax law called Section 3401(a) which states: “For purposes of this chapter (chapter 24 – withholding on employees), any term used in this section which is also used in section 401 has the same meaning as when used in such section.” This basically means that anything defined under Chapter 21 will have the same definition under Chapter 24 as well. So all we need to know now is where to find the definition of “wages” under Chapter 21.

The term “wages” is defined in section 3401(a) and is stated as: “The wages paid to an employee for employment shall be deemed to include all remuneration for services, including commissions, fees, bonuses, and tips.” This means that any money you make from your job – whether it is through salary, wages, commissions or bonuses – will be included when the IRS determines if your government wage income exceeds $110,100.

Simple said, the Medicare Qualified Government Wages definition is the amount of money you make before your government employer starts paying half of your Social Security taxes.