What Does Cafe 125 Mean on Your W-2 Tax Form?

Your employer may break down the amounts you contributed to your Section 125 plan, or it may list the amount as one payment. For example, if you have only a health insurance plan, ​box 14​ may show one amount for medical, dental and vision. This is because all of those deductions are excluded from federal income tax, Social Security tax, and typically state and local income tax. Usually, what is reported there is your medical insurance premiums that are paid with pre-tax income. They are not taxed and are not included in your W-2 Box 1 wages so you can not deduct them as medical expenses.

These deductions not only decrease the employee’s taxable income, but also reduce the employer’s payroll tax liabilities. To sponsor a section 125 plan, businesses must employ an average of 100 or fewer employees during either of the preceding two years. The main benefit of one of these employer-sponsored cafeteria plans is that it allows employees more control over which benefits will be earmarked with their pre-tax earnings on their W-2 tax forms.

Cafeteria plans are also known as Section 125 plans, referencing that section of the IRS code, hence the name Café 125. Section 125 plans are available to all employees, as well as their spouses and dependents. What you will see on your W-2 is a reduction in your gross wages because the cafeteria plan lowered your salary. For example, if you earn ​$50,000 a year​, but you receive ​$4,000 per year​ in cafeteria benefits, you are only paying taxes on ​$46,000 annually​.

How Does Cafe 125 Affect My Taxes?

Most employees subject to these additional taxes are aware of it and know to select the correct category for box 14. To understand the amount in ​box 14​, you must know the taxes that don’t apply to your Section 125 deductions. Note that Archer Medical Savings Accounts (MSAs) are not eligible for Cafe 125 plans. These MSAs were created to help the self-employed and small businesses with medical care costs.

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The money deferred to pretax plans should already be subtracted from the total amount of your wages reported in box 1 on your W-2. You should verify that this information is reported correctly before filing your tax return. It’s essential you understand these details as it impacts your taxable income and overall tax liability.

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• Section 125 of the Internal Revenue Service code gives employers the option to offer employees a plan that allows the employee to pay qualified expenses with pre-tax dollars.
• On a W-2 tax form, “Cafe 125” refers to a section that deals with certain benefits offered to you by your employer.

Income allotted to cafeteria plans is taken directly from an employee’s paycheck before taxes are taken out. These pre-tax contributions can save the employee hundreds—possibly even thousands—of dollars in income taxes and Social Security and Medicare taxes over the course of a year. Employees also have the advantage of choosing which programs to enroll in and which to decline to get the specific benefits that are most important to them. Your employer’s cafeteria plan offers you this assortment so you can tailor your benefits to your needs. This might mean deciding between different health insurance plans, opting for a certain amount to go into your retirement fund, or even setting aside pre-tax dollars for dependent care.

Common Mistakes to Avoid with Cafeteria 125 Plans

• Participating in a Cafeteria 125 plan can indirectly affect your ability to contribute to an IRA by lowering your Modified Adjusted Gross Income (MAGI).
• These reductions are reflected in Box 1 of your W-2 form, which reports your taxable wages after pre-tax deductions.
• Unlike Health Savings Accounts (HSAs), FSAs typically have a “use it or lose it” policy, meaning any unused funds are forfeited at the end of the plan year.
• Your box 1 W2 wages are already reduced by the amount you pay towards health insurance.

For example, some Pennsylvania employees have to pay an unemployment tax, and that tax is listed in Box 14. On your W-2 form, you’ll typically find the Cafeteria 125 information in Box 14, labeled “Other.” This box is used for additional information that doesn’t fit into the standard boxes on the form. You may see an entry labeled “Caf 125” or “Section 125” followed by a dollar amount. Now that we understand Cafeteria 125 plans, let’s explore how they are represented on your W-2 form. With TurboTax Live Full Service, a local expert matched to your unique situation will do your taxes for you start to finish. Or, get unlimited help and advice from tax experts while you do your taxes with TurboTax Live Assisted.

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W-2 form is a crucial document your employer provides at the start of the year, summarizing your earnings and taxes withheld throughout the previous year. “Cafe 125” within this form denotes a Section 125 cafeteria plan, offering you a range of benefits as an employee. When you see “Cafe 125” on your W-2, it signifies that your employer has a cafeteria plan in place.

Do I need a section 125 plan?

Since these contributions reduce your taxable wages, they may also reduce the wage base used to calculate your unemployment benefits, resulting in slightly lower unemployment payments. However, the long-term tax savings from participating in the plan often outweigh this potential short-term impact on unemployment benefits. This reduction is deposited into your 125 plan account for you to draw upon later to pay qualified expenses.

Take note of the connection between benefit selection timing and your W-2 as it helps you make what is cafe 125 on w2 informed choices that shape your tax situation for the upcoming year. You’ll choose “Cafe 125” benefits during your initial enrollment period or during designated open enrollment periods, typically held annually by your employer. It’s like a window of opportunity for you to review, adjust, or enroll in various benefit options. Pre-tax deductions within “Cafe 125” on a W-2 form are like secret agents working behind the scenes to benefit you. It is the portion of your salary set aside before your taxes are calculated.

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One other thing to note about qualifications for tax exemption under the cafeteria plan is the employee status. If you are part owner of the company, you may not qualify for a cafeteria plan. For example, if you own more than ​two percent​ shares in an S-Corp company, you will not be able to partake in the plan for tax exemptions. We help taxpayers understand and access options available through the IRS Fresh Start Program. Be aware of the contribution limits for various components of your Cafeteria 125 plan, such as FSAs and HSAs. The IRS sets annual limits on these contributions, and exceeding these limits can result in tax consequences.

Some benefits not generally covered by a cafeteria plan include education assistance, meals, transportation and certain types of medical savings accounts. The majority of IRS Code 125 cafeteria plans are not subject to Medicare taxation, and many employers find these plans beneficial for both their companies and for their employees. Cafeteria plans allow employers to save money on payroll taxes by allowing employee choices of income deferment. A cafeteria plan can also help to build employee loyalty over time, since it can save workers money as well as give them access to benefits they may not have otherwise been able to afford.

You employer must have the company’s 125 plan carefully written, offering employees both taxable benefits and non-taxable benefits. For instance, your health insurance premiums are free from federal income, Social Security and Medicare taxes. However, life insurance premiums of more than $50,000 are subject to Social Security and Medicare taxes. Boxes 1, 3 and 5 represent your federal, Social Security and Medicare taxable wages, respectively. The premiums paid under a cafeteria plan are not included in these taxable wages if they are not subject to these taxes. “Cafe 125” on a W-2 denotes a Section 125 cafeteria plan where you choose benefits like health insurance or retirement plans.

For instance, if your gross salary is $25,000 per year and you contributed $2,000 to your 125 plan, the W-2 will show a taxable income of $23,000. You do not need to file any special IRS forms or schedules to take advantage of this lower tax liability. During this period, you’ll receive information about the available benefits, like health plans, retirement contributions, or flexible spending accounts. The choices you make during this time affect your paycheck deductions and, consequently, your W-2.